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As Filed Pursuant to Rule 424(b)(1)
Registration No. 333-16453
PROSPECTUS
$100,000,000
OFFER TO EXCHANGE
10 5/8% SENIOR SECURED NOTES DUE 2003
FOR ALL OUTSTANDING 10 5/8% SENIOR SECURED NOTES DUE 2003
OF
SHOP VAC CORPORATION
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON FEBRUARY
17, 1997 UNLESS EXTENDED.
Shop Vac Corporation, a New Jersey corporation ("Shop Vac" or the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 10 5/8% Senior Secured Notes due 2003 (the "Exchange Notes"), which
exchange has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement of which this Prospectus
is a part (the "Registration Statement"), for each $1,000 principal amount of
its outstanding 10 5/8% Senior Secured Notes due 2003 (the "Private Notes"), of
which $100,000,000 in aggregate principal amount are outstanding as of the date
hereof. The form and terms of the Exchange Notes are the same as the form and
terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act, and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) Holders of the Exchange
Notes will not be entitled to certain rights of Holders of the Private Notes
under the Registration Rights Agreement (as defined), which rights will
terminate upon the consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Private Notes (which they replace) and will be
entitled to the benefits of an indenture dated as of October 1, 1996 governing
the Private Notes and the Exchange Notes (the "Indenture"). The Private Notes
and the Exchange Notes are sometimes referred to herein collectively as the
"Notes." See "The Exchange Offer" and "Description of Exchange Notes."
The Notes will rank pari passu in right of payment with all existing and
future senior Indebtedness of the Company, including the New Revolving Credit
Facility (as defined), and will rank senior in right of payment to future
subordinated Indebtedness of the Company. The Notes are secured by a first
priority pledge of all of the outstanding capital stock of the Company (the
"Millers' Stock"). The New Revolving Credit Facility will be secured by a pledge
of the inventories and accounts receivable of the Company and Felchar
Manufacturing Corporation, the Company's domestic motor manufacturing subsidiary
("Felchar"). See "Description of Certain Indebtedness." As of September 30,
1996, after giving pro forma effect to the Private Offering and the application
of the net proceeds therefrom, the aggregate principal amount of senior
Indebtedness of the Company and its subsidiaries would have been approximately
$113.6 million, $100.0 million of which would have been represented by the
Notes. In addition, the Notes would have been structurally subordinated to
approximately $6.4 million of Indebtedness and approximately $38.7 million of
other liabilities (including trade payables) of the Company's subsidiaries.
The Exchange Notes will bear interest at the same rate and on the same
terms as the Private Notes. Consequently, the Exchange Notes will bear interest
at the rate of 10 5/8% per annum and the interest thereon will be payable
semi-annually in arrears on March 1 and September 1 of each year, commencing
March 1, 1997. The Exchange Notes will bear interest from and including the date
of issuance of the Private Notes (October 1, 1996). Holders whose Private Notes
are accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the Private Notes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is January 28, 1997
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The Exchange Notes will be redeemable at the option of the Company, in
whole or in part, on or after September 1, 2000, at the redemption prices set
forth herein, plus accrued and unpaid interest thereon, if any, to the date of
redemption. If less than all of the Exchange Notes are to be redeemed at any
time, selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Notes are listed or, if the Exchange Notes are not
so listed, on a pro rata basis, by lot or by such method as the Trustee shall
deem fair and appropriate; provided that no Exchange Notes of $1,000 or less
shall be redeemed in part. Upon the occurrence of a Change of Control (as
defined), Holders of the Exchange Notes will have the right to require the
Company to repurchase their Exchange Notes, in whole or in part, at a purchase
price equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
repurchase. The New Revolving Credit Facility contains prohibitions of certain
events that constitute a Change of Control. In addition, the exercise by the
Holders of Exchange Notes of their right to require the Company to repurchase
the Exchange Notes or of their rights under the Pledge Agreement could cause a
default under the New Revolving Credit Facility. The Company's ability to pay
cash to the Holders of Exchange Notes upon a repurchase may be limited by the
Company's then existing financial resources. See "Description of
Notes -- Repurchase at the Option of Holders -- Change of Control."
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on February 17,
1997, unless the Exchange Offering is extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date. Private Notes may be tendered only in
integral multiples of $1,000. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer -- Conditions."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a Holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided that the Holder is acquiring
the Exchange Notes in the ordinary course of its business and is not
participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company, as required
by the Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Company believes that none of the registered Holders of the Private
Notes is an affiliate (as such term is defined in Rule 405 under the Securities
Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Exchange Notes will not be listed on any securities exchange, but the
Private Notes are eligible for trading in the National Association of Securities
Dealers, Inc.'s Private Offerings, Resales and Trading through Automatic
Linkages (PORTAL) market. There can be no assurance that an active market for
the Notes will develop. To the extent that a market for the Notes does develop,
the market value of the Notes will depend on market conditions (such as yields
on alternative investments), general economic conditions, the Company's
financial condition and certain other factors. Such conditions might cause the
Notes, to the extent that they are traded, to trade at a significant discount
from face value. See "Risk Factors -- Absence of Public Market; Restrictions on
Transfer."
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where such
Private Notes were acquired by
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such broker-dealer as a result of market-making activities or other trading
activities. The Company has indicated its intention to make this Prospectus (as
it may be amended or supplemented) available to any broker-dealer for use in
connection with any such resale for a period of 180 days after the Expiration
Date. See "The Exchange Offer -- Resale of the Exchange Notes" and "Plan of
Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer. See "The Exchange Offer -- Resale of the Exchange Notes."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
SEE "RISK FACTORS," BEGINNING ON PAGE 12, FOR A DISCUSSION OF CERTAIN
FACTORS THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE EXCHANGE NOTES.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL APRIL 28, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN
CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company ("DTC" or
the "Depositary") and registered in its name or in the name of Cede & Co., as
its nominee. Beneficial interests in the global note representing the Exchange
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by the Depositary and its participants. After the initial
issuance of such global note, Exchange Notes in certificated form will be issued
in exchange for the global note only in accordance with the terms and conditions
set forth in the Indenture. See "The Exchange Offer -- Book-Entry Transfer" and
"Book Entry; Delivery and Form."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed financial and other information contained
elsewhere herein. Prospective investors are urged to read this Prospectus in its
entirety. Unless otherwise indicated, all references herein to the "Company"
include information relating to the Shop Vac business only and do not include
the McCulloch business.
THE COMPANY
OVERVIEW
Shop Vac believes that it is a leading worldwide manufacturer and marketer
of consumer and industrial wet/dry vacuum cleaners and accessories. The Company
has maintained a leadership position in North America since it introduced the
wet/dry vacuum to the consumer market under the Shop-Vac(R) brand name in the
late 1960s. The Company estimates that its products account for over half of the
domestic consumer wet/dry vacuum market, with almost twice the market share of
its closest competitor. The Company also markets its wet/dry vacuums
internationally in over 70 countries under the Aqua-Vac(R) and Goblin(R) brand
names. Based upon the Company's knowledge and experience in the industry, the
Company believes that the Aqua-Vac(R) line of wet/dry vacuums is a leading brand
in Western Europe. Shop Vac believes that it has maintained a leading worldwide
market position by promoting strong brand awareness and product quality,
building and maintaining close relationships with its customers and, in North
America, utilizing cost-effective vertically integrated manufacturing processes.
For the nine months ended September 30, 1996, the Company had net sales and
EBITDA (as defined) of $151.3 million and $14.5 million, respectively.
The Company manufactures and markets a comprehensive line of wet/dry
vacuums in various combinations of tank size, motor horsepower and attachment
accessories, which are designed for consumer, industrial/commercial and
professional needs. Features include motors ranging from 1.0 to 5.0 peak
horsepower, tank sizes ranging from one to 55 gallons, detachable hand-held
blowers and a variety of accessories such as extension wands, brushes and
nozzles. The Company designs most of its products for the consumer market, which
accounted for approximately 90% of the Company's net sales in 1995. The Company
also manufactures and markets a full line of floor care products, including
conventional dry vacuums, carpet cleaners and steam cleaners, to selected
international markets.
Shop Vac's product design, operations, sales and marketing are managed in
two groups: (i) North America, which is comprised of the United States, Canada,
Latin America and Australia, and (ii) Europe, which is comprised of Europe and
the remaining countries in which the Company does business. The Company sells
its products in North America through its own direct sales force primarily
through national and regional mass merchandisers, home centers, hardware chains,
warehouse clubs and industrial distributors. The Company's major North American
customers include Ace Hardware Corporation ("Ace Hardware"), Builder's Square, a
division of Kmart Corporation ("Kmart"), Canadian Tire Corporation ("Canadian
Tire"), The Home Depot ("Home Depot"), Kmart, Wal-Mart Stores, Inc. ("Wal-Mart")
and W.W. Grainger, Inc. ("W.W. Grainger"). The Company has been recognized for
its quality products and service during the last seven years with "Vendor of the
Year" or similar awards from a number of major retailers, including Canadian
Tire, Kmart and WalMart. The Company markets its products internationally
primarily through home centers and electrical appliance chains, as well as
through catalogs. Shop Vac's customers in Europe include home centers, such as
Castorama, S.A. ("Castorama") in France; electrical appliance chains, such as
DSG Retail Limited ("Curry's") in the United Kingdom; catalog showrooms, such as
Argos Distributors Limited ("Argos") in the United Kingdom; mail order catalogs,
such as Otto Versand G.m.b.H & Co. ("Otto") in Germany; and hypermarkets, such
as Carrefour S.N.C. ("Carrefour") in France. The customers noted in this
paragraph contributed approximately 47% of the Company's total revenues for the
year ended December 31, 1995 and the nine months ended September 30, 1996.
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DISCONTINUED MCCULLOCH OPERATIONS
In 1990, the Company acquired the McCulloch chainsaw and lawn and garden
business (the "McCulloch Acquisition") in order to take advantage of Shop Vac's
manufacturing expertise and distribution network, as well as complementary
product selling seasons. At that time, the Company initiated a strategy to
capitalize on McCulloch's strengths, focusing on sales growth through product
diversification and the expansion of international operations. Following the
McCulloch Acquisition, the Company made a substantial investment in expanding
McCulloch's product lines, including redesigning McCulloch's gasoline and
electric chain saw lines, as well as introducing electric trimmers and leaf
blowers into the market. During this period, a significant portion of the
Company's cash flow and management resources were diverted to McCulloch. Despite
this investment, subsequent operating results of McCulloch were below
expectations largely due to intense competition within McCulloch's industry and
greater than expected working capital needs. Consequently, in 1995 the Company's
Board of Directors undertook a strategic plan to focus on the Company's core
wet/dry vacuum business, to reduce debt and to establish a capital structure
that would provide Shop Vac with the financial and operating flexibility to
maximize its core business opportunities. Accordingly, on November 1, 1995,
McCulloch was sold, and, for financial reporting purposes, the McCulloch
business has been classified as a discontinued operation. In addition, a charge
was taken in the last quarter of 1995 to reflect a loss on the sale of
McCulloch. See "McCulloch Disposition," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 11 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
COMPETITIVE STRENGTHS
Management believes that the Company enjoys the following competitive
advantages:
Strong Brand Name Recognition. The Shop-Vac(R) brand name has been
synonymous in North America with the wet/dry vacuum since the Company introduced
the wet/dry vacuum cleaner to the consumer market in the late 1960s. Independent
market research indicates that awareness of the Shop-Vac(R) brand name among
potential wet/dry vacuum purchasers in the United States has averaged
approximately 90% since 1987. The Company's international brands, Aqua-Vac(R)
and Goblin(R) also have strong brand name recognition in their respective
markets. The Company has built and maintained its well-recognized brand name by
manufacturing and selling high quality, powerful products at competitive prices.
Market Leadership. The Shop-Vac(R) brand image has helped the Company
achieve and maintain the leading position in its major markets. The Company
estimates that its products currently account for more than half of the $275
million domestic consumer wet/dry vacuum industry, with almost twice the market
share of its largest domestic competitor. In addition, the Aqua-Vac(R) brand of
wet/dry vacuums is a leading brand in Western Europe. See "Risk
Factors -- Competition" and "Business -- Competition."
Established Customer Relationships and Extensive Distribution Network. The
Company has been the primary supplier of wet/dry vacuums to its top ten
customers in the United States and Canada for an average of over 17 years. In
addition, the Company believes that its products currently account for virtually
all of the wet/dry vacuum business of seven of its top ten customers in the
United States and Canada, and many retailers carry the Company's products at all
of their locations. Although the European market is more fragmented than in the
United States and Canada, the Company benefits from its well-established
relationships with major retailers in various Western European countries. The
Company estimates that its products are distributed through over 25,000 retail
outlets in North America and over 5,000 retail outlets in Europe.
Distinct Product Position. In North America, the Company's wet/dry
products are positioned by retailers as utility vacuums and, therefore, are sold
through hardware, rather than floor care, departments. As a result, in North
America Shop Vac's wet/dry products do not compete with conventional vacuums for
retailer shelf space. In addition, the Company enjoys diversified distribution
through hardware chains and home centers, as well as through mass merchants. As
a hardware product, Shop Vac has benefited from the trend towards
"do-it-yourself" work by homeowners and the growth of national home center
chains. A similar trend
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is developing in Europe which the Company believes will enhance its sales in
Europe in light of the Company's relationships with European home center chains.
Brand Loyalty. Management estimates that approximately half of the
Company's domestic sales in 1995 were to customers who owned or had previously
owned a Shop-Vac(R). The Company estimates that it has an installed base of
approximately 18.0 million wet/dry vacuum units in North America and
approximately 3.5 million units in Europe, with these Shop-Vac(R) and
Aqua-Vac(R) owners being likely to purchase new or replacement Shop-Vac(R) and
Aqua-Vac(R) vacuums in the future. In addition, the Company's installed base
results in Shop-Vac(R) and Aqua-Vac(R) owners purchasing replacement parts,
filters and other related products, which accounted for approximately 10% of net
sales in 1995.
Low Cost Producer. The Company has over 25 years of experience in
developing, manufacturing and continually enhancing its line of wet/dry vacuum
cleaners and related products. To maximize profitability, the Company is
vertically integrated in North America. By controlling all major aspects of the
manufacturing process through its integrated facilities in North America, the
Company is able to control product quality and reduce lead times and delivery
costs. In addition, as a vertically integrated manufacturer, the Company is able
to design new products and enhance existing products in order to facilitate a
simplified manufacturing process, thereby reducing costs. Since the European
market is more fragmented, the Company outsources the majority of its components
in Europe, which allows for the added flexibility that is necessary to offer
smaller and more diverse product offerings for sale in various countries.
Family Management and Ownership. The Company is owned and operated by
Jonathan and Matthew Miller, the sons of the Company's founder. Jonathan Miller,
the Chairman of the Board and Chief Executive Officer of the Company and the
President of the North American Group, has worked at the Company or its
predecessor, Craftool Company, since 1970. Matthew Miller, the President of the
European Group, has worked at the Company since 1975. The Miller family
collectively owns all of the capital stock of the Company (the "Millers'
Stock"), which has been pledged as collateral for the Notes. See "Risk
Factors -- Control by Principal Stockholders; Dependence on Key Personnel,"
"Principal Stockholders," and "Description of Exchange Notes -- Security."
BUSINESS STRATEGY
The Company's business strategy consists of the following key elements:
Emphasize Improved Profitability and Cash Flow. Following the decision to
sell McCulloch, the Company focused on its core operations and initiated a
series of operational improvements targeted at reducing expenses and increasing
cash flow. These improvements include consolidation of certain manufacturing
operations, administrative personnel reductions, improved inventory control and
implementation of manufacturing innovations and automation. For example, in
1995, the Company began using an automated liquid coloring system instead of a
manual mixing process and converted certain plastic parts from thermal plastic
to a lower cost thermoset material. In 1996, the Company consolidated its
plastic molding facility formerly in Norwich, New York into its Canton,
Pennsylvania operations and has initiated consolidation of a small manufacturing
facility in France into its European manufacturing operations in Ireland. The
benefits of these programs and the impact of certain other factors are evident
in the Company's recent operating results, including gross margin improvement
from 23.0% to 24.7% and a reduction in selling, general and administrative
expenses as a percentage of net sales from 16.7% to 15.9% for the nine months
ended September 30, 1995 and 1996, in each case, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
Maintain Leading Market Position. The Company intends to continue to
capitalize on the strengths of its brands and maintain its worldwide market
leadership position. In this capacity, the Company will continue to maintain
close relationships with its customers and manufacture quality products which
lead to high levels of customer satisfaction.
Expand International Sales. The Company intends to continue to leverage
the Shop-Vac(R) and Aqua-Vac(R) brand names to achieve global distribution of
products and product line extensions. The Company
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intends to increase its advertising and promotional activity to broaden
international awareness of its products. As part of this strategy, the Company
is seeking to develop independent distribution channels in countries where it
currently does not have a major presence. In addition, from time to time, the
Company coordinates with its major customers' expansion into new markets. For
example, while Shop Vac's products have been sold in Mexico in the past, the
Company intends to expand its presence in Mexico and the rest of Latin America
alongside Wal-Mart, its longtime customer. See "Risk Factors -- Foreign
Operations."
Emphasize Product Innovation. The Company seeks to expand the wet/dry
vacuum cleaner product category by introducing new products under the
Shop-Vac(R) and Aqua-Vac(R) brand names and continually upgrading existing
products in response to consumer preferences, changing market dynamics and
technological advancements. For example, in 1994, the Company successfully
introduced into the North American market the Shop-Vac 1x1(R), a smaller
light-weight hand-held wet/dry vacuum intended for use in the home. In addition,
in 1995, the Company began to offer the QSP(R)(Quiet Super Power) line of
wet/dry vacuums which offer easier handling and quieter operations without
sacrificing motor power. The QSP(R) is the only "quiet" wet/dry vacuum in the
market, and consumer response has been very favorable. In Europe, the Synchro(R)
line of vacuums ("Synchro(R)") was introduced in 1991. The Synchro(R) includes
an adaptor that enables power tools, such as electric saws and sanders equipped
with dust extraction outlets, to be connected directly to the vacuum. In 1995,
the new "quiet" operating wet/dry vacuum and carpet shampooer, the Aqua Vac(R)
Multipro(R) (the "Multipro(R)"), was introduced in Europe.
FINANCING
The Company undertook the Private Offering in order to refinance
substantially all of its existing indebtedness. On October 1, 1996, the Company
and Felchar, as borrowers, entered into a Credit Agreement with First Union
National Bank of North Carolina (the "New Revolving Credit Facility") which
provides for revolving credit borrowings of up to $25 million in aggregate
principal amount, at any one time outstanding, subject to certain borrowing base
requirements. As of October 31, 1996, no amounts were outstanding under the New
Revolving Credit Facility and approximately $23.0 million was available based
upon the Company's Borrowing Base (as defined). The New Revolving Credit
Facility is secured by the inventory and accounts receivable of the Company and
Felchar. See "Description of Certain Indebtedness -- New Revolving Credit
Facility" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Company is a New Jersey corporation that has its principal executive
offices at 2323 Reach Road, Williamsport, Pennsylvania, 17701, telephone: (717)
326-0502.
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THE EXCHANGE OFFER
THE EXCHANGE OFFER.............. The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Private Notes that
are properly tendered and accepted. The
Company will issue Exchange Notes on or
promptly after the Expiration Date. There is
$100,000,000 aggregate principal amount of
Private Notes outstanding. See "The Exchange
Offer -- Purpose of the Exchange Offer."
Based on an interpretation by the staff of
the Commission set forth in no-action letters
issued to third parties, the Company believes
that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Private
Notes may be offered for resale, resold and
otherwise transferred by a Holder thereof
(other than (i) a broker-dealer who purchases
such Exchange Notes directly from the Company
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act
or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under
the Securities Act), without compliance with
the registration and prospectus delivery
provisions of the Securities Act; provided
that the Holder is acquiring Exchange Notes
in the ordinary course of its business and is
not participating, and had no arrangement or
understanding with any person to participate,
in the distribution of the Exchange Notes.
Each broker-dealer that receives Exchange
Notes for its own account in exchange for
Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such Exchange Notes. See "The
Exchange Offer -- Resale of the Exchange
Notes."
REGISTRATION RIGHTS AGREEMENT... The Private Notes were sold by the Company on
October 1, 1996 to Lehman Brothers Inc. and
First Union Capital Markets Corp.
(collectively, the "Initial Purchasers")
pursuant to a Purchase Agreement, dated
September 25, 1996, by and among the Company
and the Initial Purchasers (the "Purchase
Agreement"). Pursuant to the Purchase
Agreement, the Company and the Initial
Purchasers entered into a Registration Rights
Agreement, dated as of October 1, 1996 (the
"Registration Rights Agreement"), which
grants the Holders of the Private Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such
rights, which will terminate upon the
consummation of the Exchange Offer. See "The
Exchange Offer -- Termination of Certain
Rights."
EXPIRATION DATE................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on February 17, 1997,
unless the Exchange Offer is extended by the
Company in its sole discretion, in which case
the term "Expiration Date" shall mean the
latest date and time to which the Exchange
Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
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ACCRUED INTEREST ON THE EXCHANGE
NOTES AND THE PRIVATE NOTES... The Exchange Notes will bear interest from
and including the date of issuance of the
Private Notes (October 1, 1996). Holders
whose Private Notes are accepted for exchange
will be deemed to have waived the right to
receive any interest accrued on the Private
Notes. See "The Exchange Offer -- Interest on
the Exchange Notes."
CONDITIONS TO THE EXCHANGE
OFFER......................... The Exchange Offer is subject to certain
customary conditions that may be waived by
the Company. The Exchange Offer is not
conditioned upon any minimum aggregate
principal amount of Private Notes being
tendered for exchange. See "The Exchange
Offer -- Conditions."
PROCEDURES FOR TENDERING
PRIVATE NOTES................. Each Holder of Private Notes wishing to
accept the Exchange Offer must complete, sign
and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Private Notes and any other required
documentation to Marine Midland Bank, as
exchange agent (the "Exchange Agent"), at the
address set forth herein. By executing the
Letter of Transmittal, the Holder will
represent to and agree with the Company that,
among other things, (i) the Exchange Notes to
be acquired by such Holder of Private Notes
in connection with the Exchange Offer are
being acquired by such Holder in the ordinary
course of its business, (ii) if such Holder
is not a broker-dealer, such Holder is not
currently participating in, does not intend
to participate in, and has no arrangement or
understanding with any person to participate
in a distribution of the Exchange Notes,
(iii) if such Holder is a broker-dealer
registered under the Exchange Act or is
participating in the Exchange Offer for the
purposes of distributing the Exchange Notes,
such Holder will comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the Exchange Notes
acquired by such person and cannot rely on
the position of the staff of the Commission
set forth in no-action letters (see "The
Exchange Offer -- Resale of Exchange Notes"),
(iv) such Holder understands that a secondary
resale transaction described in clause (iii)
above and any resales of Exchange Notes
obtained by such Holder in exchange for
Private Notes acquired by such Holder
directly from the Company should be covered
by an effective registration statement
containing the selling securityholder
information required by Item 507 or Item 508,
as applicable, of Regulation S-K of the
Commission and (v) such Holder is not an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. If the Holder
is a broker-dealer that will receive Exchange
Notes for its own account in exchange for
Private Notes that were acquired as a result
of market-making activities or other trading
activities, such Holder will be required to
acknowledge in the Letter of Transmittal that
such Holder will deliver a prospectus in con-
6
<PAGE> 10
nection with any resale of such Exchange
Notes; however, by so acknowledging and by
delivering a prospectus, such Holder will not
be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. See "The Exchange Offer --
Procedures for Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender such Private
Notes in the Exchange Offer should contact
such registered Holder promptly and instruct
such registered Holder to tender on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on such owner's own
behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering such owner's Private Notes, either
make appropriate arrangements to register
ownership of the Private Notes in such
owner's name or obtain a properly completed
bond power from the registered Holder. The
transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date. See
"The Exchange Offer -- Procedures for
Tendering."
GUARANTEED DELIVERY
PROCEDURES.................... Holders of Private Notes who wish to tender
their Private Notes and whose Private Notes
are not immediately available or who cannot
deliver their Private Notes, the Letter of
Transmittal or any other documentation
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date
must tender their Private Notes according to
the guaranteed delivery procedures set forth
under "The Exchange Offer -- Guaranteed
Delivery Procedures."
ACCEPTANCE OF THE PRIVATE NOTES
AND DELIVERY OF THE EXCHANGE
NOTES......................... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Private
Notes that are properly tendered in the
Exchange Offer prior to the Expiration Date.
The Exchange Notes issued pursuant to the
Exchange Offer will be delivered on the
earliest practicable date following the
Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
WITHDRAWAL RIGHTS............... Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date. See
"The Exchange Offer -- Withdrawal of
Tenders."
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS................ For a discussion of certain material federal
income tax considerations relating to the
exchange of the Exchange Notes for the
Private Notes, see "Certain Federal Income
Tax Considerations."
EXCHANGE AGENT.................. Marine Midland Bank is serving as the
Exchange Agent in connection with the
Exchange Offer.
7
<PAGE> 11
THE EXCHANGE NOTES
The Exchange Offer applies to $100,000,000 aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) Holders of the Exchange
Notes will not be entitled to certain rights of Holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Private Notes (which they replace) and will be issued under, and be
entitled to the benefits of, the Indenture. For further information and for
definitions of certain capitalized terms used below, see "Description of
Exchange Notes."
SECURITIES OFFERED.............. $100,000,000 aggregate principal amount of
10 5/8% Senior Secured Notes due 2003.
ISSUER.......................... Shop Vac Corporation.
INTEREST........................ The Exchange Notes will bear interest at the
rate of 10 5/8% per annum, and such interest
will be payable semi-annually in arrears on
March 1 and September 1, commencing on March
1, 1997, to Holders of record at the close of
business on the immediately preceding
February 15 and August 15. See "Description
of Exchange Notes -- Principal, Maturity and
Interest."
INTEREST PAYMENT DATES.......... March 1 and September 1, commencing March 1,
1997.
MATURITY DATE................... September 1, 2003.
OPTIONAL REDEMPTION............. The Notes will be redeemable, in whole or in
part, at the option of the Company at any
time on or after September 1, 2000, at the
redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated
Damages (as defined), if any, to the date of
redemption. See "Description of Exchange
Notes -- Optional Redemption."
CHANGE OF CONTROL............... In the event of a Change of Control (as
defined), the Holders of the Notes will have
the right to require the Company to purchase
their Notes at a price equal to 101% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if
any, to the date of purchase. See
"Description of Exchange Notes -- Repurchase
at the Option of Holders -- Change of
Control."
RANKING......................... The Exchange Notes will rank pari passu in
right of payment with all existing and future
senior Indebtedness of the Company and senior
in right of payment to all future
subordinated Indebtedness of the Company. As
of September 30, 1996, after giving pro forma
effect to the Private Offering and the
application of the net proceeds therefrom,
the aggregate principal amount of outstanding
senior Indebtedness of the Company and its
subsidiaries would have been approximately
$113.6 million, $100.0 million of which would
have been represented by the Notes. In
addition, the Notes would have been
structurally subordinated to approximately
$6.4 million of Indebtedness and
approximately $38.7 million of other
liabilities (including trade
8
<PAGE> 12
payables) of the Company's subsidiaries. See
"Description of Exchange Notes -- General."
SECURITY........................ The Notes are secured by a first priority
pledge of the Millers' Stock. The New
Revolving Credit Facility is secured by a
pledge of the inventories and accounts
receivable of the Company and Felchar. See
"Description of Exchange Notes -- Security"
and "Description of Certain
Indebtedness -- New Revolving Credit
Facility."
CERTAIN COVENANTS............... The Indenture contains certain covenants
that, among other things, limit the ability
of the Company and its subsidiaries to incur
additional Indebtedness and issue preferred
stock, pay dividends or make other
distributions, repurchase Equity Interests or
subordinated Indebtedness, create certain
liens, enter into certain transactions with
affiliates, sell assets of the Company or its
subsidiaries, issue or sell Equity Interests
of the Company's subsidiaries or enter into
certain mergers and consolidations. In
addition, under certain circumstances, the
Company will be required to offer to purchase
the Exchange Notes at a price equal to 100%
of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages,
if any, to the date of purchase, with the
proceeds of certain asset sales. See
"Description of Exchange Notes -- Certain
Covenants."
RISK FACTORS
See "Risk Factors" on pages 12 through 18 hereof, for a discussion of
certain factors that should be considered in connection with the Exchange Offer
and an investment in the Exchange Notes.
9
<PAGE> 13
SUMMARY FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information of the Company as of and for the periods indicated below. The
summary consolidated financial data, excluding pro forma data, as of and for the
years ended December 31, 1993, 1994, and 1995 were derived from the audited
consolidated financial statements of the Company included elsewhere herein. The
summary financial data for the nine months ended September 30, 1995 and
September 30, 1996 have been derived from unaudited interim consolidated
financial statements of the Company and are not necessarily indicative of the
results to be expected for the full fiscal year. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company, together with the related notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Net sales................................................ $224,726 $250,843 $ 231,323 $165,135 $151,308
Cost of sales............................................ 162,710 182,694 179,416 127,229 113,980
-------- -------- --------- -------- --------
Gross profit........................................... 62,016 68,149 51,907 37,906 37,328
Selling, general and administrative expense.............. 38,421 41,867 35,637 27,442 24,044
Restructuring charges.................................... -- -- -- -- 4,714
-------- -------- --------- -------- --------
Income from operations................................. 23,595 26,282 16,270 10,464 8,570
Interest expense......................................... 7,210 8,826 11,629 8,966 7,175
Non-operating expense (income), net...................... (870) 9 459 299 396
-------- -------- --------- -------- --------
Income from continuing operations before income taxes
and cumulative effect of changes in accounting
principles........................................... 17,255 17,447 4,182 1,199 999
Income taxes............................................. 5,130 4,964 1,425 1,006 1,172
-------- -------- --------- -------- --------
Income (loss) from continuing operations before
cumulative effect of changes in accounting
principles........................................... 12,125 12,483 2,757 193 (173)
-------- -------- --------- -------- --------
Discontinued operations:
Loss from operations of discontinued business, net..... (4,148) (4,525) (10,639) (6,397) --
Loss on disposal of discontinued business, net......... -- -- (120,296)(1) -- --
-------- -------- --------- -------- --------
Loss on discontinued operations........................ (4,148) (4,525) (130,935)(1) (6,397) --
-------- -------- --------- -------- --------
Income (loss) before cumulative effect of changes in
accounting principles.................................. 7,977 7,958 (128,178) (6,204) (173)
Cumulative effect of changes in accounting principles,
net.................................................... (1,049) -- -- -- --
-------- -------- --------- -------- --------
Net income (loss)........................................ $ 6,928 $ 7,958 $(128,178) $ (6,204) $ (173)
======== ======== ========= ======== ========
Ratio of earnings to fixed charges(2).................... 3.3x 2.9x 1.4x 1.1x 1.1x
Pro forma ratio of earnings to fixed charges(2).......... 1.2x --
OTHER DATA:
EBITDA(3)................................................ $ 27,873 $ 31,336 $ 22,402 $ 15,050 $ 14,533
Depreciation and amortization............................ 4,278 5,054 6,132 4,586 5,963(8)
Capital expenditures, net................................ 7,656 7,838 8,042 7,614 155
Net cash provided (used) by:
Operating activities................................... 6,639 3,707 (18,930) (23,156) (4,366)
Investing activites.................................... (14,809) (20,390) 19,293 (9,920) (155)
Financing activities................................... 6,246 15,635 230 33,871 4,856
Pro forma ratio of EBITDA to cash interest 1.9x 1.6x
expense(3)(4)(5).......................................
Pro forma ratio of total debt to EBITDA(3)(5)............ 5.2x 5.9x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1996
------------------------------------- ------------------------------
1993 1994 1995 ACTUAL AS ADJUSTED(6)
-------- -------- --------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets(7).............................. $207,678 $252,582 $ 135,480 $ 137,635 $ 148,569
Total debt................................... 78,669 94,304 95,650 100,506 113,640
Stockholders' equity (deficit)............... 72,539 82,906 (41,601) (41,608) (44,012)
</TABLE>
10
<PAGE> 14
- ---------------
(1) Reflects a charge taken with respect to the sale of McCulloch. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "McCulloch Disposition."
(2) Pro forma income (loss) from continuing operations before income taxes was
$2.8 million and $(1.5) million for the year ended December 31, 1995 and the
nine months ended September 30, 1996, respectively, and includes the effect
of the Exchange Offer as if it had been consummated on January 1, 1995. For
the purpose of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) from continuing operations before income taxes plus
fixed charges. Fixed charges consist of interest expense on all indebtedness
plus the interest portion of rental expense on non-cancelable leases and
amortization of debt issuance costs and debt discount. For the nine months
ended September 30, 1996, earnings were insufficient to cover pro forma
charges by approximately $1.5 million.
(3) EBITDA represents pretax income from continuing operations, plus
depreciation and amortization, and does not include non-operating expense
(income), net, which represents non-cash charges to earnings associated with
foreign currency translations. EBITDA is presented because it is a widely
accepted financial indicator of cash flow and the ability to service debt.
EBITDA is not intended to represent cash flow, as determined in accordance
with generally accepted accounting principles ("GAAP"), and it should not be
considered as an alternative to, or more meaningful than, operating income
or net income as an indicator of operating performance and should not be
considered as a substitute for measures of performance prepared in
accordance with GAAP. EBITDA has been included because the Company uses it
as one means of analyzing its ability to service its debt, the Company's
lenders use it for the purpose of analyzing the Company's performance with
respect to the credit agreement and the Indenture and the Company
understands that it is used by certain investors as one measure of a
company's historical ability to service debt. Not all companies calculate
EBITDA in the same fashion and therefore EBITDA as presented may not be
comparable to other similarly titled measures of other companies. Management
believes that the improvement in EBITDA (excluding the non-recurring
restructuring charge taken in the period ending September 30, 1996) reflects
an improvement in its operating results and its ability to service
indebtedness.
(4) Pro forma cash interest expense represents total pro forma interest expense
of $12.8 million and $9.5 million for the year ended December 31, 1995 and
the nine months ended September 30, 1996, respectively, assuming that the
Private Notes had been sold and the proceeds therefrom had been applied as
of January 1, 1995, and excludes the sum of amortized debt issuance costs
and discounts on sales of receivables of $900,000 and $600,000 for those
periods, respectively.
(5) The pro forma ratio of EBITDA to cash interest expense and the pro forma
ratio of total debt to EBITDA provide additional indicators of the Company's
ability to service debt. Management believes that these ratios should be
reviewed by prospective investors because the Company uses them as one means
of analyzing its ability to service its debt, the Company's lenders use them
for the purpose of analyzing the Company's performance with respect to the
credit agreement and the Indenture and the Company understands that they are
used by certain investors as one measure of a company's historical ability
to service its debt. Not all companies calculate EBITDA in the same fashion
and therefore these ratios as presented may not be comparable to other
similarly titled measures of other companies. The pro forma ratio of EBITDA
to cash interest expense and the pro forma ratio of total debt to EBITDA are
based on the assumption that the Private Notes had been sold and the
proceeds therefrom had been applied as of January 1, 1995.
(6) After giving effect to the Private Offering and the use of the estimated net
proceeds therefrom as if the Private Offering had been consummated on
September 30, 1996.
(7) Includes $53.1 million, $67.1 million, $19.0 million and $21.3 million of
net current assets associated with McCulloch as of December 31, 1993, 1994
and 1995 and September 30, 1996, respectively, and $47.6 million and $54.4
million of net non-current assets associated with McCulloch as of December
31, 1993 and 1994, respectively. Net non-current assets associated with
McCulloch as of December 31, 1995 and September 30, 1996 were nil. See
"McCulloch Disposition" and Note 11 to the consolidated financial statements
of the Company and its subsidiaries included elsewhere herein.
(8) Includes $1.0 million of charges included in the September 30, 1996
restructuring charge.
11
<PAGE> 15
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider all of the information contained
in this Prospectus and, in particular, should evaluate the following risk
factors. Certain statements in this Prospectus that are not historical fact
constitute "forward-looking statements." Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results of the Company to be materially different from results expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other factors include, but are not limited to, the following:
FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, Holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
Holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own accounts in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. To
the extent that Private Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Private Notes
could be adversely affected due to the limited amount, or "float," of the
Private Notes that are expected to remain outstanding following the Exchange
Offer. Generally, a lower "float" of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security. For the same reason, to the extent that a large amount of Private
Notes are not tendered or are tendered and not accepted in the Exchange Offer,
the trading market for the Exchange Notes could be adversely affected. See "Plan
of Distribution" and "The Exchange Offer."
SUBSTANTIAL LEVERAGE; RECENT DEFAULTS
The Company is, and will continue to be after the issuance of the Exchange
Notes offered hereby, highly leveraged. As of September 30, 1996, after giving
pro forma effect to the Private Offering and the use of proceeds therefrom, the
Company would have had, on a consolidated basis, indebtedness of $113.6 million
and a stockholders' deficit of $44.5 million. After giving pro forma effect to
the Private Offering and the use of proceeds therefrom as if such transaction
had occurred on January 1, 1995, for the year ended December 31, 1995 and for
the nine months ended September 30, 1996, the Company's ratio of earnings to
fixed charges would have been 1.2 to 1 and .8 to 1, respectively.
The degree to which the Company will be leveraged following the Exchange
Offer could have important consequences to Holders of the Notes, including, but
not limited to, the following (i) a substantial portion of the Company's cash
flow from operations will be required to be dedicated to the Company's interest
expense obligations and may not be available to the Company for its operations,
working capital, capital expenditures or other purposes and (ii) the Company's
ability to obtain financing in the future for such purposes may be limited. The
Company believes that, based on current levels of operations and anticipated
improvements in operating results, cash flow from operations together with
revolving credit borrowings will be sufficient to conduct its business after the
issuance of the Exchange Notes and to meet its near-term debt service
obligations and working capital needs. However, there can be no assurance that
future cash flow of the Company will be sufficient to meet the Company's
obligations and commitments or that anticipated improvements in operating
results will be achieved. In the event the Company is unable to meet its
obligations with respect to its existing indebtedness, it may be required to
refinance or restructure all or a portion of such
12
<PAGE> 16
indebtedness, sell material assets or operations or seek to raise additional
debt or equity capital. There can be no assurance that the Company would be able
to effect any such refinancing or restructuring or sell assets or obtain any
such additional capital on satisfactory terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Prior to the Company's repayment of the Old Revolving Credit Facility and
the Old Senior Notes with a portion of the proceeds from the Private Offering,
the Company had been in breach of various financial covenants contained in the
agreements governing the Old Revolving Credit Facility and the Old Senior Notes.
Consequently, the Holders of the Old Senior Notes and the lender under the Old
Revolving Credit Facility had the right at any time after such breach to
accelerate the Company's obligations and to require the Company to repay all of
the principal and accrued and unpaid interest due thereon, as well as any
penalties with respect to such acceleration. In addition, the Company failed to
make an aggregate principal payment of $6.7 million to the Holders of the Old
Senior Notes that was due on April 30, 1996. Prior to April 30, 1996, the
Company commenced discussions with the Holders of the Old Senior Notes and the
lender under the Old Revolving Credit Facility with a view to amending the terms
of its outstanding debt agreements. On August 28, 1996, the Company entered into
the Amendment Agreements (referred to herein, individually, as an "Amendment
Agreement" and, collectively, the "Amendment Agreements") with the Holders of
the Old Senior Notes and the lender under the Old Revolving Credit Facility
which suspended the relevant financial covenants and payment dates with respect
to payments due or past due under either the Old Senior Notes or the Old
Revolving Credit Facility to provide that no principal payments will become due
until October 31, 1996. Both the Old Revolving Credit Facility and the Old
Senior Notes have been repaid in full with a portion of the proceeds of the
Private Offering, and the Company is in full compliance with the terms of the
agreements governing all of its outstanding indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Certain
Indebtedness" and "Description of Exchange Notes -- Certain Covenants."
RELIANCE ON CERTAIN CUSTOMERS
During 1995 and the nine months ended September 30, 1996, the Company's
aggregate net sales to its ten largest customers were 49% and 56%, respectively,
of its total net sales. Wal-Mart accounted for approximately 13% and 10% of the
Company's aggregate net sales for 1995 and the nine-month period ended September
30, 1996, respectively. Two of the Company's ten largest customers, Wal-Mart and
Sam's Club, are affiliated with each other; combined net sales to these two
entities represented approximately 14% and 12% of the Company's net sales in
1995 and the first nine months of 1996, respectively. Although Europe is a
fragmented market, in some countries certain merchandisers account for a
substantial portion of the Company's sales in such countries. For example, the
Company's sales through Argos and GUS accounted for 38% and 17%, respectively,
of the Company's sales in the United Kingdom for the nine-month period ended
September 30, 1996, and the Company's sales through Castorama and Carrefour
accounted for 33% and 11%, respectively, of the Company's sales in France,
respectively, for the nine-month period ended September 30, 1996. The Company
believes that its dependence on sales to a limited number of major retail
customers will increase as mass merchandisers continue to dominate the
consolidating retail industry. The Company does not have contracts with any of
its customers. The Company's business with its customers is done on a purchase
order basis. A decrease in business from any of its major customers could have a
material adverse effect on the Company's results of operations and financial
condition which in turn could adversely affect the Company's ability to meet its
principal and interest obligations on the Notes. In addition, the timing of
purchases by these major customers could cause quarterly fluctuations in the
Company's results of operations. See "Business -- Sales and Marketing,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 9 to the Consolidated Financial Statements of the Company
and Its Subsidiaries included elsewhere herein.
FOREIGN OPERATIONS
The Company has significant operations outside the United States and
Canada, located principally in Western Europe. During the year ended December
31, 1995 and the nine months ended September 30, 1996,
13
<PAGE> 17
the Company generated revenues from sales outside the United States and Canada
of $83.3 million and $57.4 million, respectively, representing approximately 36%
and 38%, respectively, of the Company's total net sales during such periods. In
addition, the Company's products sold in Europe are manufactured outside of the
United States. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
The Company incurred aggregate restructuring charges of approximately $4.7
million in the third quarter of 1996 in connection with the consolidation of
certain of its foreign operations. In addition, the Company recorded charges of
approximately $200,000 and $600,000 related to accounts receivable and
inventories at these locations. These amounts are recorded in selling, general
and administrative expenses and cost of sales, respectively. Furthermore, the
Company expects to incur an aggregate amount of approximately $500,000 (pre-tax)
of additional expenses in the fourth quarter of 1996 and the first quarter of
1997 related to these locations. Although the Company expects that the
termination of these distribution operations will negatively impact sales in the
near-term, the Company expects to continue sales to its major customers in these
markets on a direct basis. There can be no assurance, however, that the
Company's direct sales efforts will be successful in recapturing any lost volume
in the near-term or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The value of the Company's foreign sales and earnings varies with currency
exchange rate fluctuations. Changes in currency exchange rates have in the past
affected the Company's results of operations and could in the future have an
adverse effect on the Company's results of operations, which in turn could
adversely affect the Company's ability to meet its interest and principal
obligations under its indebtedness, including the Notes. Furthermore,
international manufacturing and sales are subject to other inherent risks
including labor unrest, political instability, restrictions on transfer of
funds, export duties and quotas, domestic and foreign customs and tariffs,
current and changing regulatory environments, difficulty in obtaining
distribution and support, and potentially adverse tax consequences. There can be
no assurance that these factors will not have a material adverse effect on the
Company's financial condition and results of operations, or its ability to
increase or maintain its international sales.
In general, United States federal and foreign tax laws provide that income
of foreign subsidiaries is subject to tax only in the local jurisdiction and is
not subject to United States federal income tax unless, and only to the extent,
that such income is distributed as a dividend to the United States parent
company. In general, the Company does not intend to cause its foreign
subsidiaries to pay dividends to the Company and expects that the net income of
such subsidiaries will be retained abroad in most circumstances. Consequently,
the Company may not be able to utilize the cash flow generated by its foreign
operations to service its domestic indebtedness.
COMPETITION
Competition in the wet/dry vacuum market is, and will continue to be,
intense. Some of the Company's current and potential competitors are larger and
have greater financial and marketing resources than the Company. Intensified
competition could force the Company to decrease its prices and, as a
consequence, reduce its margins. In North America, since 1993, the Hoover
Company ("Hoover"), The Eureka Company ("Eureka") and Royal Manufacturing
Company ("Royal") have introduced limited lines of consumer wet/dry vacuum
products. Upon the entrance of these new competitors into the market, the
Company made a strategic decision to reduce product prices slightly, and, as a
result, Shop Vac experienced a modest decline in gross margin upon
implementation of the new pricing structure in the first quarter of 1993. There
can be no assurance that in the future heightened or additional competition will
not have a material adverse effect on the Company's financial condition and
results of operations. In Europe, Karcher, Alfred, G.m.b.H. & Co. ("Karcher"), a
large and well-financed manufacturer, is a leading competitor with the Company's
wet/dry vacuum, conventional vacuum and steam cleaner products. There can be no
assurance that existing competitors will not substantially increase their
resources devoted to the development and marketing of products that are
competitive with those of the Company, nor can there be any assurance that
additional competitors with substantial resources will not seek to enter the
wet/dry vacuum market and compete directly with the Company. See
"Business -- Competition."
14
<PAGE> 18
MCCULLOCH DISPOSITION AND RELATED OBLIGATIONS
As a result of the McCulloch disposition, the Company has certain
continuing indemnity obligations including, but not limited to, indemnification
of the purchaser of McCulloch with respect to certain potential environmental,
lease, product and workers' compensation liabilities. See "-- Environmental" and
"McCulloch Disposition."
ENVIRONMENTAL
The Company is subject to constantly changing federal, state, local and
foreign laws and regulations that govern activities or operations that may have
adverse environmental effects such as discharges to air and water and handling
and disposal practices for solid and hazardous wastes. These laws and
regulations generally impose liability for the costs of cleaning up damage
resulting from past spills, improper disposals or other releases of hazardous
materials. The Company believes that it currently conducts its operations and in
the past has operated its business in substantial compliance with applicable
environmental laws and regulations. However, there can be no assurance that
future environmental laws or regulations, or reinterpretations of existing laws
and regulations, or conditions existing as of the date hereof of which the
Company's management is currently unaware, will not subject the Company to
substantial expense or otherwise have a material adverse impact on its
operations.
The Company has agreed to indemnify the purchaser of McCulloch against all
environmental liabilities with respect to all circumstances existing prior to
the closing of the McCulloch disposition, subject to certain thresholds with
respect to known chromium contamination at the McCulloch facility at Lake Havasu
City, Arizona. Since the closing of the McCulloch disposition, McCulloch has
discovered two distinct incidences of contamination at the Lake Havasu City
facility in addition to the chromium contamination: (i) low concentrations of
trichloroethylene in groundwater and (ii) gasoline-related substances (i.e.,
benzene, toluene, ethylbenzene and xylene) down-gradient of the site where two
underground gasoline storage tanks were removed in 1992. The sites are currently
under investigation by McCulloch and the Arizona Department of Environmental
Quality ("ADEQ"), and additional groundwater sampling has been proposed.
Although the Company has a reserve to satisfy current and potential
environmental claims, there can be no assurance that such reserve will be
sufficient to cover all charges with respect to the Company's environmental
indemnity obligations or that the Company will have adequate resources to
satisfy McCulloch's claims under the environmental indemnity. If the Company
fails to honor its contractual obligations, it could be subject to a lawsuit
seeking specific performance or other remedies. See "Business -- Environmental,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental" and "McCulloch Disposition."
EFFECTIVE RANKING
The Notes will rank pari passu with the Company's other senior obligations,
including the Company's trade payables, and payment of the Company's obligations
under the Notes is secured by the Millers' Stock, which has been pledged by the
Millers. However, the Company's obligations under the New Revolving Credit
Facility is secured by first priority liens on the inventory and accounts
receivable of the Company and Felchar. Under certain circumstances, certain
other indebtedness of the Company and its subsidiaries may be secured by liens
on other assets of the Company and such subsidiaries. If the Company becomes
insolvent or is liquidated or if any of its secured indebtedness is accelerated,
the holders of such secured indebtedness would be entitled to payment in full
out of the assets securing such indebtedness prior to any payment to the Holders
of Notes. If the lender under the New Revolving Credit Facility or the holders
of any other secured indebtedness were to foreclose on the collateral securing
the Company's obligations to them, it is possible that after satisfaction of all
such other secured indebtedness in full, the value of the security granted to
the Holders of the Notes and their portion, if any, of the Company's assets not
pledged to any other creditor would be insufficient to satisfy fully the claims
of the Holders of Notes. See "Description of Certain Indebtedness -- New
Revolving Credit Facility" and "Description of the Exchange Notes."
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The Company's stockholders will have no obligations under the Notes, the
Indenture or the Pledge Agreement. The Holders of the Notes shall have no
recourse to the income or assets of any of the Company's stockholders, except
with respect to the Millers' Stock. See "Description of Exchange
Notes -- Security."
In addition, the Company conducts a portion of its operations, including
substantially all of its foreign operations, through subsidiaries. To the extent
that any such subsidiary incurs indebtedness and becomes insolvent or is
liquidated, secured and unsecured creditors of such subsidiary would be entitled
to payment from the proceeds of such subsidiary's assets before the Company and
its creditors would derive any value from such subsidiary's assets. As of
September 30, 1996, after giving effect to the Private Offering and the New
Revolving Credit Facility, the Company's subsidiaries would have had
approximately $6.4 million of indebtedness and approximately $38.7 million of
other liabilities (including trade payables) outstanding. The Company's
subsidiaries may incur additional indebtedness in the future, subject to the
restrictions imposed by the New Revolving Credit Facility and the Indenture. See
"Description of Certain Indebtedness -- New Revolving Credit Facility" and
"Description of Exchange Notes."
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to purchase all of the
Notes then outstanding at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase. If a Change of Control were to occur, the
Company might not have the financial resources to repay all of its obligations
under the New Revolving Credit Facility, the Notes and other indebtedness that
might become payable upon the occurrence of such Change of Control. See
"Description of Exchange Notes" and "Description of Certain Indebtedness -- New
Revolving Credit Facility."
COST OF RAW MATERIALS
Raw materials purchased comprised approximately 56% of the Company's annual
cost of sales in 1995. There can be no assurance that increases in raw materials
costs will be recovered through price increases. Copper, polypropylene resins
and corrugated paper are the Company's primary raw materials, and the prices of
such materials fluctuate significantly. Although the Company is studying the
potential benefits of hedging the cost of some of its raw materials with the use
of commodities futures contracts, the Company has not historically done so and
may not engage in hedging transactions. As a result, there can be no assurance
that the Company's gross margins will not be adversely affected by increases in
raw materials costs in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Raw Materials."
CONTROL BY PRINCIPAL STOCKHOLDERS; DEPENDENCE ON KEY PERSONNEL
Jonathan Miller and Matthew Miller together beneficially own 100% of the
outstanding voting securities of the Company. As a result, they have the ability
to control the Company's management, policies and financing decisions and to
elect all of the members of the Company's Board of Directors. In addition, the
Company's success will depend, in large part, on the efforts, abilities and
experience of Jonathan Miller, Matthew Miller and W. Earl Stogner. The loss of
the services of such individuals could have a material adverse effect on the
Company's financial condition and results of operations. See "Management" and
"Principal Stockholders."
LACK OF PRODUCT DIVERSITY
The Company's business is focused on the production and marketing of a line
of wet/dry vacuum cleaners. In the year ended December 31, 1995 and the first
nine months of 1996, respectively, the Company generated 88% and 91% of net
sales and 93% and 97% of gross profits from sales of wet/dry vacuum cleaners and
related accessories. Because the Company is largely dependent on a single
product line, the Company is vulnerable to changing consumer preferences and
product innovations which would result in decreased sales or market share.
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DEPENDENCE ON MANUFACTURING FACILITIES
The Company's business strategy and efforts to control cost depend, in
part, on the vertical integration of the Company's manufacturing, assembly and
distribution of its products. The Company currently owns and operates (i) a
motor manufacturing facility in Binghamton, New York (the "Motor Factory") which
manufactures substantially all of the motors used in the assembly of the
Company's wet/dry vacuum products for the domestic market and (ii) a plastic
molding facility in Canton, Pennsylvania (the "Plastic Factory") which
manufactures substantially all of the plastic components for the Company's
domestic wet/dry vacuum products. Although the Company insures both facilities,
if either the Motor Factory or the Plastic Factory were destroyed or otherwise
rendered unusable for an extended period of time, the Company would have to
purchase components from independent vendors. The prices charged by independent
vendors may vary and are likely to be higher than the costs the Company
currently incurs to manufacture those components. In addition, the quality of
components available from independent vendors varies and may be inferior to the
quality of the components currently manufactured by the Company, and there can
be no assurance that such replacement components would be available on a timely
basis or at all. Consequently, the loss of either the Motor Factory or the
Plastic Factory could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Manufacturing."
LEGAL PROCEEDINGS
The Company is involved in various lawsuits from time to time in the
ordinary course of business. See "Business -- Legal Proceedings."
FRAUDULENT TRANSFER CONSIDERATIONS
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Company, at the time it issued the Private Notes, (a) incurred such indebtedness
with the intent to hinder, delay or defraud creditors, or (b)(i) received less
than reasonably equivalent value or fair consideration and (ii)(A) was insolvent
at the time of such incurrence, (B) was rendered insolvent by reason of such
incurrence (and the application of the proceeds thereof), (C) was engaged or was
about to engage in a business or transaction for which the assets remaining with
the Company constituted unreasonably small capital to carry on its business, or
(D) intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they mature, then, in each such case, a court of competent
jurisdiction could avoid, in whole or in part, the Notes or, in the alternative,
subordinate the Notes to existing and future indebtedness of the Company. The
measure of insolvency for purposes of the foregoing would likely vary depending
upon the law applied in such case. Generally, however, the Company would be
considered insolvent if the sum of its debts, including contingent liabilities,
was greater than all of its assets at a fair valuation, or if the present fair
saleable value of its assets was less than the amount that would be required to
pay the probable liabilities on its existing debts, including contingent
liabilities, as such debts become absolute and matured. Management of the
Company believes that, for purposes of the United States Bankruptcy Code and
state fraudulent transfer or conveyance laws, the Private Notes were issued
without the intent to hinder, delay or defraud creditors and for proper purposes
and in good faith, and that the Company will receive reasonably equivalent value
or fair consideration therefor, and that after the issuance of the Private Notes
and the application of the net proceeds therefrom, the Company is solvent, will
have sufficient capital for carrying on its business and will be able to pay its
debts as they mature. However, there can be no assurance that a court passing on
such issues would agree with the determination of the Company's management.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
As of the date of this Prospectus, there are 11 registered Holders of the
Private Notes. The Company believes that, as of the date of this Prospectus,
none of such Holders is an affiliate (as such term is defined in Rule 405 under
the Securities Act) of the Company. Prior to the Private Offering there had been
no market for the Notes, and there can be no assurance that such a market will
develop or, if such a market develops, as to the liquidity of such market. The
Exchange Notes will not be listed on any securities exchange, but the
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<PAGE> 21
Private Notes are eligible for trading in the National Association of Securities
Dealers, Inc.'s Private Offerings, Resales and Trading through Automatic
Linkages ("PORTAL") market. The Exchange Notes are new securities for which
there is currently no market. The Initial Purchasers have advised the Company
that it intends to make a market in the Exchange Notes, as well as the Private
Notes, as permitted by applicable laws and regulations; however, the Initial
Purchasers are not obligated to do so, and may discontinue any such market
making activities at any time without notice. In addition, such market making
activity may be limited during the Exchange Offer and the pendency of the Shelf
Registration Statement (as defined in the Registration Rights Agreement).
Therefore, there can be no assurance that an active market for the Notes will
develop. If a trading market develops for the Exchange Notes future trading
prices of such securities will depend on many factors, including, among other
things, prevailing interest rates, the market for similar securities, the
performance of the Company and other factors. In addition, based on such
factors, the Notes may trade at a discount from their initial offering price.
See "The Exchange Offer" and "Plan of Distribution."
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<PAGE> 22
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on October 1, 1996 (the "Closing
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Private Notes to (i) "qualified institutional
buyers" ("QIBs"), as defined in Rule 144A under the Securities Act ("Rule
144A"), in reliance on Rule 144A and (ii) a limited number of institutional
"accredited investors" ("Accredited Institutions"), as defined in Rule
501(a)(1),(2), (3) or (7) under the Securities Act. As a condition to the sale
of the Private Notes, the Company and the Initial Purchasers entered into the
Registration Rights Agreement on October 1, 1996. Pursuant to the Registration
Rights Agreement, the Company agreed that, unless the Exchange Offer is not
permitted by applicable law or Commission policy, it would (i) file with the
Commission a Registration Statement under the Securities Act with respect to the
Exchange Notes within 60 days after the Closing Date, (ii) use its best efforts
to cause such Registration Statement to become effective under the Securities
Act within 120 days after the Closing Date and (iii) commence the Exchange Offer
and use its best efforts to issue, on or prior to 30 days after the date on
which the Registration Statement was declared effective by the Commission,
Exchange Notes in exchange for all Private Notes tendered prior thereto in the
Exchange Offer. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement. The Registration Statement is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement and the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a Holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such Holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who exchanges Private Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes to
the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any Holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes or is a broker-dealer,
such Holder cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Private Notes where such Private Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed to make this Prospectus, as it may be amended or supplemented from
time to time, available to broker-dealers for use in connection with any resale
for a period of 180 days after the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000
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principal amount of outstanding Private Notes surrendered pursuant to the
Exchange Offer. Private Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) Holders of the Exchange Notes will not
be entitled to any of the rights of Holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under, and be entitled
to the benefits of, the Indenture, which also authorized the issuance of the
Private Notes, such that both series of Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, $100,000,000 in aggregate principal
amount of the Private Notes are outstanding. Only a registered Holder of the
Private Notes (or such Holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered Holders of the Private Notes entitled to participate in the Exchange
Offer.
Holders of the Private Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
February 17, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered Holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "-- Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered Holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be
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distributed to the registered Holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the amendment and the manner of disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 10 5/8% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on each
March 1 and September 1, commencing March 1, 1997. Holders of Exchange Notes
will receive interest on March 1, 1997 from the date of initial issuance of the
Exchange Notes, plus an amount equal to the accrued interest on the Private
Notes from the date of initial delivery to the date of exchange thereof for
Exchange Notes. Holders of Private Notes that are accepted for exchange will be
deemed to have waived the right to receive any interest accrued on the Private
Notes.
PROCEDURES FOR TENDERING
Only a registered Holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a Holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the Holder must comply with
the guaranteed delivery procedures described below.
The tender by a Holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered Holder
promptly and instruct such registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered Holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
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the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "-- Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such Holder of
Private Notes in connection with the Exchange Offer are being acquired by such
Holder in the ordinary course of the respective business of such Holder, (ii)
such Holder has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iii) if such Holder is a resident of
the State of California, it falls under the self-executing institutional
investor exemption set forth under Section 25102(i) of the Corporate Securities
Law of 1968 and Rules 260.102.10 and 260.105.14 of the California Blue Sky
Regulations, (iv) if such Holder is a resident of the Commonwealth of
Pennsylvania, it falls under the self-executing institutional investor exemption
set forth under Sections 203(c), 102(d) and (k) of the Pennsylvania Securities
Act of 1972, Section 102.111 of the Pennsylvania Blue Sky Regulations and an
interpretive opinion dated November 16, 1985, (v) such Holder acknowledges and
agrees that any person who is a broker-dealer registered under the Exchange Act
or is participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in certain no-action letters,
(vi) such Holder understands that a secondary resale transaction described in
clause (v) above and any resales of Exchange Notes obtained by such Holder in
exchange for Private Notes acquired by such Holder directly from the Company
should be covered by an effective registration statement containing the selling
securityholder information required by Item 507 or
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Item 508, as applicable, of Regulation S-K of the Commission and (vii) such
Holder is not an "affiliate," as defined in Rule 405 under the Securities Act,
of the Company. If the Holder is a broker-dealer that will receive Exchange
Notes for such Holder's own account in exchange for Private Notes that were
acquired as a result of market-making activities or other trading activities,
such Holder will be required to acknowledge in the Letter of Transmittal that
such Holder will deliver a prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a prospectus,
such Holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the Holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering Holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make
book-entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"-- Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Private
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
23
<PAGE> 27
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 P.M. on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer -- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the staff of the
Commission.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of Holders to
withdraw such Private Notes (see "-- Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders of the Private Notes, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of Holders of the Private Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such Holders (including
any broker-dealers) and certain parties related to such Holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any Holder of a transfer-restricted Private Note, the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Private Notes pursuant to Rule 144A, (iii) to use its
best efforts to keep the Registration Statement effective to the extent
necessary to ensure that it is available for resales of transfer-restricted
Private Notes by broker-dealers for a period of up to 120 days from the
Expiration Date and (iv) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request for a period of up to 180 days
after the Expiration Date.
LIQUIDATED DAMAGES
In the event of a Registration Default (as defined in the Registration
Rights Agreement), the Company will pay Liquidated Damages to each Holder of
Transfer Restricted Securities (as defined below), with
24
<PAGE> 28
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $0.05 per week per $1,000 principal
amount of Private Notes constituting Transfer Restricted Securities held by such
Holder. Transfer Restricted Securities shall mean each Private Note until (i)
the date on which such Private Note has been exchanged for an Exchange Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of such Private Note for one or more Exchange Notes, the date on
which such Exchange Notes are sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of this Prospectus,
(iii) the date on which such Private Note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement (as defined in the Registration Rights Agreement) or (iv) the date on
which such Private Note is distributed to the public pursuant to Rule 144(k)
under the Securities Act. The amount of Liquidated Damages will increase by an
additional $0.05 per week per $1,000 principal amount of Private Notes
constituting Transfer Restricted Securities with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages of $0.50 per week per $1,000 principal amount of
Private Notes constituting Transfer Restricted Securities. Following the cure of
all Registration Defaults, the accrual of all Liquidated Damages will cease. The
filing and effectiveness of the Registration Statement of which this Prospectus
is a part and the consummation of the Exchange Offer will eliminate all rights
of the Holders of Private Notes eligible to participate in the Exchange Offer to
receive damages that would have been payable if such actions had not occurred.
Holders of Transfer Restricted Securities will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Transfer Restricted Securities included in the Shelf Registration
Agreement and benefit from the provisions regarding Liquidated Damages set forth
above.
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand Delivery:
Marine Midland Bank Marine Midland Bank
140 Broadway -- A Level 140 Broadway -- A Level
Corporate Trust Operations Corporate Trust Operations
New York, New York 10005-1180 New York, New York 10005-1180
By Overnight Delivery: By Facsimile:
Marine Midland Bank (212) 658-2292
140 Broadway -- A Level
Corporate Trust Operations Confirm by Telephone:
New York, New York 10005-1180
(212) 658-5931
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
25
<PAGE> 29
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$100,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to a person whom the seller reasonably believes is
a QIB in a transaction meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds from the Private Offering, which were approximately $95.6 million after
deducting discounts, commissions and estimated fees and expenses incurred in
connection therewith, were applied to repay certain indebtedness of the Company
and its subsidiaries which included: (a) approximately $57.0 million outstanding
under the Old Revolving Credit Facility and (b) approximately $30.0 million of
outstanding 10.83% Old Senior Notes due 2001 and approximately $2.5 million of
related prepayment fees and expenses. The remainder is being used for general
corporate purposes. For a description of the indebtedness repaid with the
proceeds of the Private Offering, see "Description of Certain Indebtedness."
26
<PAGE> 30
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1996, and on an as adjusted basis to give effect to
the Private and Exchange Offering and the use of the estimated net proceeds
therefrom as if such transactions had occurred on September 30, 1996. The
information contained in this table should be read in conjunction with the
consolidated financial statements of the Company, together with the related
notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total debt (including current maturities):
Old Revolving Credit Facility............................. $ 56,874 $ --
Old Senior Notes.......................................... 29,992 --
New Revolving Credit Facility(1).......................... -- --
10 5/8% Senior Secured Notes due 2003..................... -- 100,000
Bank lines, substantially foreign......................... 5,076 5,076
Capital lease obligations................................. 8,564 8,564
-------- --------
Total debt........................................ 100,506 113,640
Stockholders' equity (deficit)(2)........................... (41,608) (44,012)
-------- --------
Total capitalization.............................. $ 58,898 $ 69,628
======== ========
</TABLE>
- ---------------
(1) The New Revolving Credit Facility provides for a $25 million secured line of
credit which bears interest at the lender's prime rate plus 0.75% or LIBOR
plus 2.0% and matures September 30, 1999. As of October 31, 1996, the
Company had no outstanding borrowings under the New Revolving Credit
Facility and approximately $23.0 million available based upon the Company's
Borrowing Base (as defined). See "Description of Certain Indebtedness."
(2) Stockholders' equity (deficit), as adjusted, reflects a $2.5 million
prepayment penalty (approximately $2.4 million on an after-tax basis) to the
Holders of the Old Senior Notes.
27
<PAGE> 31
MCCULLOCH DISPOSITION
In 1990, the Company acquired the McCulloch chainsaw and lawn and garden
business in order to take advantage of Shop Vac's manufacturing expertise and
distribution network, as well as complementary product selling seasons. At that
time, the Company initiated a strategy to capitalize on McCulloch's strengths,
focusing on sales growth through product diversification and the expansion of
international operations. Following the McCulloch Acquisition, the Company made
a substantial investment in expanding McCulloch's product lines, including
redesigning McCulloch's gasoline and electric chain saw lines, as well as
introducing electric trimmers and leaf blowers into the market. During this
period, a significant portion of the Company's cash flow and management
resources were diverted to McCulloch. Despite this investment, subsequent
operating results of McCulloch were below expectations largely due to intense
competition within McCulloch's industry and greater than expected working
capital needs. Consequently, in 1995 the Company's Board of Directors undertook
a strategic plan to focus on the Company's core wet/dry vacuum business, to
reduce debt and to establish a capital structure that would provide Shop Vac
with the financial and operating flexibility to maximize its core business
opportunities. Accordingly, on November 1, 1995, McCulloch was sold, and for
financial reporting purposes the McCulloch business has been classified as a
discontinued operation. In connection with the McCulloch disposition, the
Company entered into a distribution agreement pursuant to which the Company
agreed to distribute McCulloch products in certain countries in Western Europe.
The Company has notified McCulloch of its intent to terminate the distribution
agreement effective not later than December 31, 1996. All prior year financial
statements have been restated to exclude McCulloch results from continuing
operations in accordance with Accounting Principles Board Opinion No. 30, and a
charge was taken in the last quarter of 1995 to reflect the loss of $120.3
million on the sale of McCulloch. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 11 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
Pursuant to the terms of the agreement governing the McCulloch disposition,
the Company is obligated to indemnify the purchaser for claims arising with
respect to the following issues, among others, (i) environmental claims, (ii)
workers' compensation and product liability claims which relate to any action,
omission, occurrence or circumstance arising prior to the McCulloch disposition
(other than those reflected on the books of McCulloch as of July 31, 1995) and
(iii) a computer equipment lease currently in dispute. With respect to
environmental claims, the Company has agreed to indemnify the purchaser of
McCulloch against all environmental liabilities with respect to all
circumstances existing prior to the closing of the McCulloch disposition,
subject to certain thresholds with respect to known chromium contamination at
the McCulloch facility at Lake Havasu City, Arizona. Since the closing of the
McCulloch disposition, McCulloch has discovered two distinct incidences of
contamination at the Lake Havasu City facility in addition to the chromium
contamination: (i) low concentrations of trichloroethylene in groundwater and
(ii) gasoline-related substances (i.e., benzene, toluene, ethylbenzene and
xylene) down-gradient of the site where two underground gasoline storage tanks
were removed in 1992. The sites are currently under investigation by McCulloch
and the ADEQ and additional groundwater sampling has been proposed. Although the
Company has a reserve to satisfy current and potential environmental claims,
there can be no assurance that such reserve will be sufficient to cover all
charges with respect to the Company's environmental indemnity obligations or
that the Company will have adequate resources to satisfy McCulloch's claims
under the environmental indemnity or other indemnity provisions. See "Risk
Factors -- Environmental," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental" and
"Business -- Environmental."
28
<PAGE> 32
SELECTED CONSOLIDATED FINANCIAL DATA
The historical selected consolidated financial data, excluding pro forma
data, presented below for, and as of the end of, the years ended December 31,
1993 through December 31, 1995 have been derived from the consolidated financial
statements of the Company and its subsidiaries, which financial statements have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The historical financial data presented below for, and as of the end of, the
years ended December 31, 1991 and 1992 have been derived from the financial
records of the Company and its subsidiaries for those years. Data has been
restated (where appropriate) to exclude McCulloch results from continuing
operations in a manner which, in the opinion of the Company, is in accordance
with Accounting Principles Board Opinion No. 30 and fairly presents the results
for such periods. The selected consolidated operating data and other data
presented below for the nine-month periods ended September 30, 1995 and 1996,
and the consolidated balance sheet data presented below as of September 30, 1996
have been derived from the unaudited consolidated financial statements of the
Company and its subsidiaries included elsewhere herein. In the opinion of
management, the unaudited consolidated financial statements for the interim
periods include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results for such periods. The results
of operations for the nine months ended September 30, 1996 are not necessarily
indicative of the results to be expected for the full fiscal year. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company, together with the related notes thereto,
included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Net sales........................................... $202,930 $217,471 $224,726 $250,843 $ 231,323 $165,135 $151,308
Cost of sales....................................... 141,833 155,350 162,710 182,694 179,416 127,229 113,980
-------- -------- -------- -------- --------- -------- --------
Gross profit...................................... 61,097 62,121 62,016 68,149 51,907 37,906 37,328
Selling, general and administrative expense......... 41,015 34,985 38,421 41,867 35,637 27,442 24,044
Restructuring charges............................... -- -- -- -- -- -- 4,714
-------- -------- -------- -------- --------- -------- --------
Income from operations............................ 20,082 27,136 23,595 26,282 16,270 10,464 8,570
Interest expense.................................... 8,174 8,142 7,210 8,826 11,629 8,966 7,175
Non-operating expense (income), net................. 28 532 (870) 9 459 299 396
-------- -------- -------- -------- --------- -------- --------
Income from continuing operations before income
taxes and cumulative effect of changes in
accounting principles........................... 11,880 18,462 17,255 17,447 4,182 1,199 999
Income taxes........................................ 5,424 5,553 5,130 4,964 1,425 1,006 1,172
-------- -------- -------- -------- --------- -------- --------
Income (loss) from continuing operations before
cumulative effect of changes in accounting
principles...................................... 6,456 12,909 12,125 12,483 2,757 193 (173)
-------- -------- -------- -------- --------- -------- --------
Discontinued operations:
Loss from operations of discontinued business,
net............................................. (760) (4,421) (4,148) (4,525) (10,639) (6,397) --
Loss on disposal of discontinued business, net.... -- -- -- -- (120,296)(1) -- --
-------- -------- -------- -------- --------- -------- --------
Loss on discontinued operations..................... (760) (4,421) (4,148) (4,525) (130,935)(1) (6,397) --
-------- -------- -------- -------- --------- -------- --------
Income (loss) before cumulative effect of changes in
accounting principles............................. 5,696 8,488 7,977 7,958 (128,178) $ (6,204) $ (173)
Cumulative effect of changes in accounting
principles, net................................... -- -- (1,049) -- -- -- --
-------- -------- -------- -------- --------- -------- --------
Net income (loss)................................... $ 5,696 $ 8,488 $ 6,928 $ 7,958 (128,178) $ (6,204) $ (173)
======== ======== ======== ======== ========= ======== ========
Ratio of earnings to fixed charges(2)............... 2.4x 3.2x 3.3x 2.9x 1.4x 1.1x 1.1x
Pro forma ratio of earnings to fixed charges(2)..... 1.2x --
OTHER DATA:
EBITDA(3)........................................... $ 26,560 $ 32,731 $ 27,873 $ 31,336 $ 22,402 $ 15,050 $ 14,533
Depreciation and amortization....................... 6,478 5,595 4,278 5,054 6,132 4,586 5,963(8)
Capital expenditures, net........................... 1,344 1,221 7,656 7,838 8,042 7,614 155
Net cash provided (used) by:
Operating activities.............................. 4,378 28,259 6,639 3,707 (18,930) (23,156) (4,366)
Investing activities.............................. (8,362) (7,282) (14,809) (20,390) 19,293 (9,920) (155)
Financing activities.............................. 2,205 (19,334) 6,246 15,635 230 33,871 4,856
Pro forma ratio of EBITDA to cash interest
expense(3)(4)(5).................................. 1.9x 1.6x
Pro forma ratio of total debt to EBITDA(3)(5)....... 5.2x 5.9x
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
---------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(6)
-------- -------- -------- -------- -------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets(7)................................ $194,656 $187,809 $207,678 $252,582 $135,480 $137,635 $148,569
Total debt..................................... 91,757 72,423 78,669 94,304 95,650 100,506 113,640
Stockholders' equity (deficit)................. 64,503 69,122 72,539 82,906 (41,601) (41,608) (44,012)
</TABLE>
- ---------------
(1) Reflects a charge taken with respect to the sale of McCulloch. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "McCulloch Disposition."
(2) Pro forma income (loss) from continuing operations before income taxes was
$2.8 million and $(1.5) million for the year ended December 31, 1995 and the
nine months ended September 30, 1996, respectively, and includes the effect
of the Exchange Offer as if it had been consummated on January 1, 1995. For
the purpose of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) from continuing operations before income taxes plus
fixed charges. Fixed charges consist of interest expense on all indebtedness
plus the interest portion of rental expense on non-cancelable leases and
amortization of debt issuance costs and debt discount. For the nine months
ended September 30, 1996, earnings were insufficient to cover pro forma
fixed charges by approximately $1.5 million.
(3) EBITDA represents pretax income from continuing operations, plus
depreciation and amortization and does not include non-operating expense
(income), net, which represents non-cash charges to earnings associated with
foreign currency translations. EBITDA is presented because it is a widely
accepted financial indicator of cash flow and the ability to service debt.
EBITDA is not intended to represent cash flow, as determined in accordance
with GAAP, and it should not be considered as an alternative to, or more
meaningful than, operating income or net income as an indicator of operating
performance and should not be considered as a substitute for measures of
performance prepared in accordance with GAAP. EBITDA has been included
because the Company uses it as one means of analyzing its ability to service
its debt, the Company's lenders use it for the purpose of analyzing the
Company's performance with respect to the credit agreement and the Indenture
and the Company understands that it is used by certain investors as one
measure of a company's historical ability to service debt. Not all companies
calculate EBITDA in the same fashion and therefore EBITDA as presented may
not be comparable to other similarly titled measures of other companies.
Management believes that the improvement in EBITDA (excluding the
non-recurring restructuring charge taken in the period ending September 30,
1996) reflects an improvement in its operating results and its ability to
service indebtedness.
(4) Pro forma cash interest expense represents total pro forma interest expense
of $12.8 million and $9.5 million for the year ended December 31, 1995 and
the nine months ended September 30, 1996, respectively, assuming that the
Private Notes had been sold and the proceeds therefrom had been applied as
of January 1, 1995, and excludes the sum of amortized debt issuance costs
and discounts on sales of receivables of $900,000 and $600,000 for those
periods, respectively.
(5) The pro forma ratio of EBITDA to cash interest expense and the pro forma
ratio of total debt to EBITDA provide additional indications of the
Company's ability to service debt. Management believes that these ratios
should be reviewed by prospective investors because the Company uses them as
one means of analyzing its ability to service its debt, the Company's
lenders use them for the purpose of analyzing the Company's performance with
respect to the credit agreement and the Indenture and the Company
understands that they are used by certain investors as one measure of a
company's historical ability to service its debt. Not all companies
calculate EBITDA in the same fashion and therefore these ratios as presented
may not be comparable to other similarly titled measures of other companies.
The pro forma ratio of EBITDA to cash interest expense and the pro forma
ratio of total debt to EBITDA are based on the assumption that the Private
Notes had been sold and the proceeds therefrom had been applied as of
January 1, 1995.
(6) After giving effect to the Private Offering and the use of the estimated net
proceeds therefrom as if the Private Offering had been consummated on
September 30, 1996.
(7) Includes $36.7 million, $36.5 million, $53.1 million, $67.1 million, $19.0
million and $21.3 million of net current assets associated with McCulloch as
of December 31, 1991, 1992, 1993, 1994 and 1995 and September 30, 1996,
respectively, and $44.3 million, $45.8 million, $47.6 million and $54.4
million of net non-current assets associated with McCulloch as of December
31, 1991, 1992, 1993 and 1994, respectively. Net non-current assets
associated with McCulloch as of December 31, 1995 and September 30, 1996
were nil. See "McCulloch Disposition" and Note 11 to the consolidated
financial statements of the Company and its subsidiaries included elsewhere
herein.
(8) Includes $1.0 million of charges included in the September 30, 1996
restructuring charge.
30
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" as well as the consolidated financial
statements of the Company and the notes thereto contained elsewhere in this
Prospectus.
OVERVIEW
The Company derives its revenues primarily from its core business, the
manufacture and sale of wet/dry vacuums. Shop Vac's product design, operations,
sales and marketing are managed in two groups: (i) North America, which is
comprised of the United States, Canada, Latin America and Australia, and (ii)
Europe, which is comprised of Europe and the remaining countries in which the
Company does business. The Company has been the North American wet/dry vacuum
market leader since it introduced the wet/dry vacuum to the consumer market in
the late 1960s. The Company's European operations also manufacture and sell
wet/dry vacuums, as well as a full line of conventional vacuums, carpet cleaners
and steam cleaners, in Europe and internationally.
Historically, there have been relatively few participants in the domestic
consumer wet/dry vacuum industry, and prior to 1993, Sears Roebuck and Company
("Sears") and The Genie Company ("Genie") were the Company's only significant
competitors. Since 1993, Hoover, Eureka and Royal have introduced limited lines
of consumer wet/dry vacuum products. The Company has not lost a single major
customer as a result of these new entrants, which, singly and in the aggregate,
have not had a material impact on the Company's market share. However, upon the
entrance of these new competitors into the market the Company made a strategic
decision to reduce certain product prices slightly, and, as a result, the
Company experienced a modest decline in gross margins upon the implementation of
the new pricing structure in the first quarter of 1993. See
"Business -- Competition" and "Risk Factors -- Competition."
On November 1, 1995, the Company sold McCulloch, and for financial
reporting purposes the McCulloch business was classified as a discontinued
operation. In connection with the McCulloch disposition, the Company entered
into a distribution agreement pursuant to which the Company agreed to distribute
McCulloch products in certain countries in Western Europe. The Company has
notified McCulloch of its intent to terminate the distribution agreement
effective not later than December 31, 1996. All prior year financial statements
have been restated to exclude McCulloch results from continuing operations in
accordance with Accounting Principles Board Opinion No. 30. See "-- Liquidity
and Capital Resources" and "McCulloch Disposition."
RECENT OPERATING IMPROVEMENTS
Following the decision in April 1995 to sell McCulloch, the Company focused
on operating improvements targeted at reducing expenses and increasing cash
flow. These improvements include (i) consolidation of certain manufacturing
operations and implementation of other manufacturing efficiencies, (ii)
improvement of inventory control and (iii) reduction of manufacturing, selling
and administrative personnel, as discussed below.
M Recent manufacturing and engineering improvements and cost-saving
measures undertaken by the Company include:
- Implementation in June 1995 of an automated liquid color system, thereby
eliminating a costly manual mixing process (estimated annualized cost
savings: $600,000);
- Implementation in the summer of 1995 of production changes which
improved yields, including reduction of manufacturing set-up costs and
reduction of scrap costs (estimated annualized cost savings: $725,000);
- Conversion in December 1995 of plastic molding material from thermal
plastic to a lower cost thermoset material (estimated annualized cost
savings: $800,000); and
- Consolidation in February 1996 of the plastic molding operations
formerly housed in its Norwich, New York facility into the Canton,
Pennsylvania facility and the temporary conversion of the Norwich
facility to a warehouse pending its sale (estimated annualized cost
savings: $800,000).
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<PAGE> 35
- In January 1995, control of all domestic inventories was assigned to a
single person who was made responsible for reducing inventory levels,
which was a substantial factor contributing to a $11.9 million reduction
in domestic inventory levels from September 1995 to September 1996.
- In April 1996, the Company implemented a reduction in its European
overhead, selling and administrative personnel (estimated annualized cost
savings: $2.9 million).
The benefits of these programs are reflected in the Company's operating
results from the dates of their implementation. The estimated annualized cost
savings set forth above are based on 1995 production levels, and the actual
savings will vary based on future production levels and other factors. There can
be no assurance that all of such estimated cost savings will be realized in the
near-term or at all. Consequently, the Company is unable to determine with more
likely than not certainty that future taxable income will be generated to enable
the Company to realize the benefits of its net operating loss carryforwards and
other deferred tax benefits. Factors considered by the Company in making this
determination include the deficit in stockholders' equity, the Company's
significant debt service requirements, the Company's default on its debt
agreements during 1996 and the decrease from 1994 to 1995 in pretax income from
continuing operations. Therefore, the Company has recognized a valuation
allowance equal to its net deferred tax asset position.
In addition to the foregoing operating improvements, the Company intends to
terminate the manufacture of steam cleaners at its facility in Salindres, France
in order to consolidate all of its European manufacturing activities into its
facility in Tralee, County Kerry, Ireland. The Company expects the cumulative
annual cost savings resulting from this consolidation to offset the closedown
charge within two years and does not expect to incur substantial additional
fixed costs as a result of this consolidation. There can be no assurance that
such estimated cost savings will be realized in the next two years or at all.
The Company also intends to terminate its distribution operations in Austria,
Germany, Hungary, the Netherlands and Spain in favor of selling directly to
customers in these markets. See "-- Liquidity and Capital Resources."
Despite the cost savings described above, the Company is unable to
determine with more likely than not certainty that future taxable income will be
generated to enable the Company to realize the benefits of its net operating
loss carryovers and other deferred tax assets. Factors considered by the Company
in making this determination include the deficit in stockholders' equity, the
Company's significant debt service requirements, the Company's default on its
debt agreements during 1996 and the decrease from 1994 to 1995 in pretax income
from continuing operations. Therefore, the Company has recognized a valuation
allowance equal to its net deferred tax asset position. See Note 7 to the
consolidated financial statements of the Company and its subsidiaries included
elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items in the Company's consolidated
statement of earnings:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 72.4 72.8 77.6 77.0 75.3
----- ----- ----- ----- -----
Gross profit............................ 27.6 27.2 22.4 23.0 24.7
Selling, general and administrative
expense.................................... 17.1 16.7 15.4 16.7 15.9
Restructuring charges........................ -- -- -- -- 3.1
----- ----- ----- ----- -----
Operating income........................ 10.5 10.5 7.0 6.3 5.7
Interest expense............................. 3.2 3.5 5.0 5.4 4.7
Non-operating expense (income), net.......... (0.4) -- 0.2 0.2 0.3
----- ----- ----- ----- -----
Income (loss) from continuing operations
before income taxes and cumulative
effect of changes in accounting
principles............................ 7.7 7.0 1.8 0.7 0.7
Income taxes (benefit)....................... 2.3 2.0 0.6 0.6 0.8
----- ----- ----- ----- -----
Income (loss) from continuing operations
before cumulative effect of change in
accounting principles................. 5.4 5.0 1.2 0.1 (0.1)
===== ===== ===== ===== =====
</TABLE>
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<PAGE> 36
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net sales in the nine months ended September 30, 1996 totaled $151.3
million, a decrease of approximately $13.8 million or 8.4%, compared to net
sales of $165.1 million in the nine months ended September 30, 1995. This
decrease is attributable primarily to (i) three major domestic retailers'
general reduction of their respective wet/dry vacuum inventory balances in
conjunction with overall programs to reduce inventory levels and reduced QSP
sales in the third quarter of 1996 compared to 1995 due to the introduction of
the QSP which resulted in increased third quarter 1995 sales to fill base
inventory requirements ($9.8 million) and (ii) lower sales volume in Europe
($4.0 million), which reflects a reduction in the volume of steam cleaner sales
due to negative publicity about steam cleaning generally ($2.7 million) and the
strengthening U.S. dollar in 1996 ($1.3 million). The Company's steam cleaner
sales have declined due to such negative publicity and there is no assurance
that the Company will not experience similar effects in the future. The negative
publicity regarding steam cleaning products in mid-1994 resulted in a decline in
the Company's (as well as the general market's) sale of these products in 1995
and a further decline in the nine months ended September 30, 1996. However, the
Company believes that the decline in sales of these products has leveled off and
future sales are expected to approximate 1996 amounts. At this level of sales,
the Company believes that it can more efficiently manufacture this product at
its Irish manufacturing facility rather than continuing to maintain its separate
French steamer manufacturing location.
Gross profit in the nine months ended September 30, 1996 totaled $37.3
million, a decrease of approximately $600,000 or 1.5% when compared to gross
profit of $37.9 million in the nine months ended September 30, 1995. Gross
profit as a percentage of net sales increased from 23.0% in the nine months
ended September 30, 1995 to 24.7% in the nine months ended September 30, 1996.
This increase in gross profit as a percentage of net sales resulted from (i) a
reduction in the cost of raw materials ($1.2 million), (ii) a lesser impact in
the 1996 period of the inventory reduction at its major domestic customers
compared to the 1995 period ($1.0 million), (iii) the manufacturing cost savings
implemented in late 1995 ($1.0 million) and (iv) the charges incurred in 1995
relating to the replacement of wet/dry vacuums in Australia as a result of
defective motor components purchased from an independent vendor (from whom the
Company no longer purchases any components) and incorporated in the Company's
products sold in Australia ($300,000). These improvements were offset by a
decline in gross profit as a result of the decrease in net sales when compared
to the prior year ($3.5 million) as well as a write down of inventories
recognized in connection with the shut down of certain European operations
($600,000).
SG&A expense decreased to $24.0 million in the nine months ended September
30, 1996 from $27.4 million in the nine months ended September 30, 1995, a
decrease of approximately $3.4 million or 12.4%. SG&A expense as a percentage of
net sales decreased from 16.7% in the nine months ended September 30, 1995 to
15.9% in the nine months ended September 30, 1996. This decrease in SG&A expense
was primarily attributable to reductions to European sales and administrative
personnel and related expenses ($1.9 million), reductions in executive
compensation ($400,000), and reductions in domestic and foreign advertising and
product promotions corresponding to the reduced sales ($600,000 and $700,000
respectively). See "Management -- Other Arrangements." These improvements were
partially offset by allowances for doubtful accounts receivable recognized in
connection with the shut down of certain European operations ($200,000).
Before the restructuring charge described below, operating income increased
to $13.3 million in the nine months ended September 30, 1996 from $10.5 million
in the nine months ended September 30, 1995, an increase of approximately $2.8
million or 26.9%. Operating income before restructuring as a percentage of net
sales increased to 8.8% in the nine months ended September 30, 1996 from 6.3% in
the nine months ended September 30, 1995.
An operating charge for restructuring European operations was incurred in
the third quarter of 1996 for $4.7 million. A $1.5 million charge resulted from
the anticipated cost of severance, lease payments, and related shutdown expenses
of the Salindres, France facility that currently manufactures steam cleaners.
These operations will be consolidated with the current floor care manufacturing
facilities in Tralee, Ireland in 1977 and will help the Company improve
efficiencies. Further, a $3.2 million charge was recognized for severance, lease
payments, and related shutdown expenses of the distribution operations in
Austria, Germany, Hungary, the Netherlands, and Spain. The Company will ship
products to its major European customers directly from
33
<PAGE> 37
its manufacturing facility in Ireland. There can be no assurance that the
Company's sales in these countries will not decline as a result of its reduced
presence in these countries.
Operating income after restructuring decreased to $8.6 million in the nine
months ended September 30, 1996 from $10.5 million in the nine months ended
September 30, 1995, a decrease of approximately $1.9 million or 18.1%. Operating
income as a percentage of net sales decreased to 5.7% in the nine months ended
September 30, 1996 from 6.3% in the nine months ended September 30, 1995.
Interest expense was $7.2 million in the nine months ended September 30,
1996, a decrease of $1.8 million or approximately 20.0%, compared to $9.0
million in the nine months ended September 30, 1995. Interest expense as a
percentage of net sales decreased from 5.4% in the nine months ended September
30, 1995 to 4.7% in the nine months ended September 30, 1996. This decrease was
related to a decrease in borrowings in the first nine months of 1996 due to (i)
the McCulloch disposition, which eliminated the need to finance McCulloch's
working capital, and (ii) the application of the McCulloch sale proceeds to
reduce existing outstanding debt.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Net sales in 1995 totaled $231.3 million, a decrease of approximately $19.5
million or 7.8%, compared to net sales of $250.8 million in 1994. This decrease
was primarily related to (i) a decrease in sales of the Company's steam cleaners
in France and Germany from $31.9 million to $16.0 million following negative
press reports in 1994 about the safety of steam cleaning products, which was
partially offset by a general increase in sales of European floor care products
($9.0 million), and (ii) a $12.6 million decrease in North American sales of
wet/dry vacuums due, in part, to (a) a decrease in net sales to warehouse clubs
which typically rotate product offerings in order to appeal to a captive
customer base ($3.9 million), (b) reductions in net sales to retailers which
experienced financial difficulties in 1995 ($3.8 million), (c) a decrease in
inventory levels maintained by two major customers in conjunction with an
overall program to reduce inventory levels ($3.0 million), and (d) mild winter
weather as well as other general factors ($1.9 million).
Gross profit in 1995 totaled $51.9 million, a decrease of approximately
$16.2 million or 23.8%, compared to gross profit of $68.1 million in 1994. Gross
profit as a percentage of net sales decreased from 27.2% in 1994 to 22.4% in
1995. This decrease in gross profit as a percentage of net sales was primarily
related to (i) the decline in European sales of steam cleaners described above
($4.8 million) and the absence of a corresponding reduction in fixed
manufacturing overhead ($2.0 million), (ii) an increase in raw materials cost
that was only partially offset by a corresponding price increase instituted by
the Company ($3.7 million), (iii) the decline in North American sales described
above ($3.3 million) and (iv) fixed overhead costs incurred during a temporary
domestic manufacturing slowdown implemented by management in response to lower
sales volume in the first six months of 1995 ($3.2 million). In addition, the
Company recorded a $1.0 million charge due to the return of products sold in
Australia as a result of defective motor components described above. These
decreases were partially offset by increased gross profit of $1.8 million on
European sales of wet/dry vacuums.
SG&A expense decreased to $35.6 million in 1995 from $41.9 million in 1994,
a decrease of approximately $6.2 million or 14.9%. SG&A expense as a percentage
of net sales decreased from 16.7% for 1994 to 15.4% for 1995. This decrease was
primarily attributable to (i) reductions in executive compensation ($1.1
million), reductions in domestic administrative personnel ($500,000) and
reductions in European sales and administrative personnel ($1.2 million)
implemented in the second quarter of 1995, (ii) reductions of various domestic
corporate overhead costs ($1.4 million), (iii) lower domestic media advertising
in 1995 than in 1994, which had been increased in 1994 in anticipation of the
launch of the Company's new QSP(R) product line ($1.0 million), (iv) other
reductions in domestic selling expenses ($500,000) and (v) reductions in
European advertising and selling expenses ($500,000).
Operating income decreased to $16.3 million in 1995 from $26.3 million in
1994, a decrease of approximately $10.0 million or 38.1%. Operating income as a
percentage of net sales decreased to 7.0% in 1995 from 10.5% in 1994. This
decrease was a result of the factors discussed above.
Interest expense was $11.6 million in 1995, an increase of approximately
$2.8 million or 31.8%, compared to $8.8 million in 1994. Interest expense as a
percentage of net sales increased from 3.5% in 1994 to 5.0% in 1995. This
increase was primarily related to additional borrowings under the Old Revolving
Credit Facility, as well as increased interest rates in 1995.
34
<PAGE> 38
Fiscal Year Ended December 31, 1994 Compared to Fiscal Year Ended December 31,
1993
Net sales totaled $250.8 million in 1994, an increase of approximately
$26.1 million or 11.6%, compared to net sales of $224.7 million in 1993. This
increase was primarily due to (i) the successful introduction of the Shop-Vac
1x1(R) in April 1994 ($17.2 million) and (ii) increased sales of the Company's
other wet/dry vacuum products in North America ($6.6 million) and in Europe
($2.3 million).
Gross profit in 1994 totaled $68.1 million, an increase of approximately
$6.1 million or 9.9%, compared to gross profit of $62.0 million in 1993.
However, gross profit as a percentage of net sales decreased from 27.6% for 1993
to 27.2% in 1994. The increase in gross profit from 1993 to 1994 was
attributable to higher sales volume. The decrease in gross profit as a
percentage of net sales was attributable to a slight decline in gross margin,
reflecting a shift in product mix after the introduction of the Shop-Vac 1x1(R),
which bears a lower gross margin than the Company's larger wet/dry vacuum
products.
SG&A expense increased to $41.9 million in 1994 from $38.4 million in 1993,
an increase of approximately $3.4 million or 9.0%. SG&A expense as a percentage
of net sales decreased from 17.1% in 1993 to 16.7% in 1994. The increase in SG&A
expense was attributable to (i) increased cooperative advertising and product
promotion expenses in North America ($1.3 million) and Europe ($1.1 million) and
(ii) unusually high media advertising expenditures incurred in the fourth
quarter of 1994 in anticipation of the introduction of the Company's new QSP(R)
product line in April 1995 ($1.0 million).
Operating income increased to $26.3 million in 1994 from $23.6 million in
1993, an increase of approximately $2.7 million or 11.4%. This increase in
operating income was a result of the factors described above.
Interest expense increased to $8.8 million in 1994, an increase of
approximately $1.6 million or 22.4% from $7.2 million in 1993. Interest expense
as a percentage of net sales increased slightly from 3.2% in 1993 to 3.5% in
1994. The increase in interest expense was primarily attributable to additional
borrowings under the Old Revolving Credit Facility in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash are cash flow from operations and
borrowings under its revolving credit facilities. The Company anticipates that
its principal uses of cash will be to provide working capital, finance capital
expenditures and meet debt service requirements.
Net cash provided (used) by operating activities was $6.6 million, $3.7
million, $(18.9 million) and ($4.4 million) in 1993, 1994, 1995 and the first
nine months of 1996, respectively, which includes net cash (used) in connection
with the discontinued McCulloch operations of $(11.4 million), $(7.1 million),
$(9.3 million) and $(3.2 million) in 1993, 1994, 1995 and the first nine months
of 1996, respectively. Net cash used for operating activities in 1995 of $18.9
million represents a use of cash borrowed under the Old Revolving Credit
Facility and foreign lines of credit to reduce accounts payable and accrued
expenses.
The Company's capital expenditures in 1993, 1994, 1995 and the first nine
months of 1996, excluding capital expenditures incurred with respect to the
discontinued McCulloch operations, were approximately $7.7 million, $7.8
million, $8.0 million and $200,000, respectively. The Company's remaining
capital expenditure requirements for 1996 are budgeted to be approximately $1.8
million. Capital expenditures for 1997 and 1998 are budgeted to be $3.0 million
and $3.5 million, respectively. The decline in the Company's capital expenditure
budget for 1996 and later years reflects a decline in anticipated capital
requirements as a consequence of major capital improvements made by the Company
in 1993, 1994 and 1995. The Company's capital expenditures incurred with respect
to the discontinued McCulloch operations in 1993, 1994, 1995 and the first nine
months of 1996 were approximately $7.2 million, $12.6 million, $2.9 million and
nil, respectively.
On May 25, 1995, the Old Revolving Credit Facility and the Old Senior Notes
were amended to permit the Company to incur $20.0 million of additional
borrowings under the Old Revolving Credit Facility for seasonal working capital
needs, of which approximately $16 million was borrowed during July 1995 and all
but $3.4 million was repaid as of October 31, 1995. However, in exchange for
such accommodation, the Company agreed to reduce its aggregate outstanding debt
by $60 million by not later than December 31, 1995.
On November 1, 1995, the Company sold McCulloch in exchange for aggregate
net proceeds of $30 million, and a charge of $120.3 million was taken in the
last quarter of 1995 to reflect the Company's loss on
35
<PAGE> 39
the sale of McCulloch, including a $19.6 million charge for certain obligations
arising as a result of the sale of McCulloch and the closure of the McCulloch
operations in Europe.
Anticipated cash costs of approximately $16.6 million to be paid over the
next five years, approximately two-thirds of which are anticipated to be paid by
December 31, 1997, relate to the Company's indemnification obligations to the
purchaser of McCulloch, the closure of McCulloch operations in Europe and the
United States, severance obligations, warehouse closings and lease terminations,
among other items. Through September 30, 1996 approximately $1.9 million of cash
had been paid with respect to those items. In connection with the McCulloch
disposition, the Company entered into a distribution agreement pursuant to which
the Company agreed to distribute McCulloch products in certain countries in
Western Europe. The Company has notified McCulloch of its intent to terminate
the distribution agreement effective not later than December 31, 1996. The
Company expects that a limited portion of the costs associated with the closure
of McCulloch's European distribution operations will be offset by the estimated
net proceeds generated from the liquidation of McCulloch-related assets of
approximately $8.6 million. There can be no assurance, however, as to the actual
amount, or timing of the receipt, of proceeds to be received with respect to the
liquidation of such inventory and accounts receivable. See "McCulloch
Disposition" and Note 11 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
The Company applied the $30 million of aggregate net proceeds from the sale
of McCulloch (i) to repay the remaining $3.4 million outstanding under the $20
million loan, (ii) to retire an $8.0 million term loan, (iii) to repay $8.3
million borrowed under the Old Revolving Credit Facility, (iv) to retire $9.2
million of the Old Senior Notes and (v) to pay a $1.1 million prepayment penalty
with respect to the Old Senior Notes. The Company, the lender under the Old
Revolving Credit Facility and the Holders of the Old Senior Notes agreed to
modify the terms of certain financial covenants through January 1, 1996 to
permit the Company to reconfigure its capital structure following the sale of
McCulloch. Prior to the Company's repayment of the Old Revolving Credit Facility
and the Old Senior Notes with a portion of the proceeds from the Private
Offering, the Company had been in breach of various financial covenants of both
the Old Senior Notes and the Old Revolving Credit Facility. In addition, the
Company failed to make a $6.7 million required principal payment in April 1996
to the Holders of the Old Senior Notes, and that payment default caused a
cross-default under the Old Revolving Credit Facility. See "Risk
Factors -- Substantial Leverage; Recent Defaults" and "Description of Certain
Indebtedness."
On August 28, 1996 the Company entered into the Amendment Agreements,
whereby (i) the Old Revolving Credit Facility was increased to $62.5 million and
(ii) the requirements to comply with financial covenants and make principal
payments were suspended through October 31, 1996 under each of the Old Revolving
Credit Facility and the Old Senior Notes. Both the Old Revolving Credit Facility
and the Old Senior Secured Notes were repaid in full with a portion of the
proceeds of the Private Offering. The Company currently is in full compliance
with the terms of all of its financings.
The Company intends to terminate the manufacture of steam cleaners at its
facility in Salindres, France in order to consolidate all of its European
manufacturing activities into its facility in Tralee, County Kerry, Ireland. In
connection with the foregoing consolidation, the Company incurred a charge in
the third quarter of 1996 of approximately $1.5 million to cover severance,
lease payments, shut-down and related expenses, of which approximately $1.1
million will be cash expenditures incurred over the next twelve months. See
"Risk Factors -- Foreign Operations."
The Company also intends to terminate its distribution operations in
Austria, Germany, Hungary, the Netherlands and Spain in favor of selling
directly to customers in these markets. In connection with such termination, the
Company incurred a charge in the third quarter of 1996 of approximately $3.2
million to cover severance, lease payments, shut-down and related expenses, of
which approximately $2.0 million will be cash expenditures incurred over the
next twelve months. Although the Company expects that the termination of these
distribution operations will negatively impact sales in the near-term, the
Company expects to continue sales to its major customers in these markets on a
direct basis. In addition, the Company recorded charges of approximately
$200,000 and $600,000 related to accounts receivable and inventories at these
locations. These amounts are recorded in selling, general and administrative
expenses and cost of sales, respectively. Furthermore, the Company expects to
incur approximately $500,000 of additional expenses in the fourth quarter of
1996 and the first quarter of 1997 related to these locations. See "Risk
Factors -- Foreign Operations."
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<PAGE> 40
In connection with the Private Offering, the Company entered into the New
Revolving Credit Facility. The New Revolving Credit Facility permits borrowings
in an amount not to exceed the lesser of $25 million or a borrowing base as set
forth in the New Revolving Credit Facility. Amounts outstanding under the New
Revolving Credit Facility will bear interest at either (i) 0.75% plus the higher
of (a) the federal funds rate plus 0.50% per annum and (b) the agent's prime
commercial lending rate or (ii) LIBOR plus 2%, determined at the Company's
option, and are secured by a first priority lien on the accounts receivable and
inventory of the Company and Felchar. As of October 31, 1996, the Company had
approximately $23.0 million of unborrowed availability under the New Revolving
Credit Facility. In addition, in connection with the Private Offering, the
Company entered into employment agreements with certain executives that provide
for incentive compensation. See "Description of Certain Indebtedness -- New
Revolving Credit Facility" and "Management -- Other Arrangements."
The Company is, and will continue to be after the issuance of the Exchange
Notes offered hereby, highly leveraged and borrowings under the New Revolving
Credit Facility will increase the Company's debt service requirements. The
Company believes that, based on current levels of operations and anticipated
improvements in operating results, cash flow from operations and borrowings
under the New Revolving Credit Facility will be sufficient to conduct its
business and to meet its near-term debt service obligations, working capital
needs, capital expenditures and the cash charges described above. However, there
can be no assurance that future cash flow of the Company will be sufficient to
meet the Company's obligations and commitments or that anticipated improvements
in operating results will be achieved. In the event the Company is unable to
meet its obligations with respect to such indebtedness, it may be required to
refinance or restructure all or a portion of such indebtedness, sell material
assets or operations or seek to raise additional debt or equity capital. There
can be no assurance that the Company would be able to effect any such
refinancing or restructuring or sell assets or obtain any such additional
capital on satisfactory terms or at all. See "Risk Factors -- Substantial
Leverage; Recent Defaults."
TAX LOSS CARRYFORWARD
The Company has an estimated tax loss carryforward for income tax purposes
of $48.7 million at December 31, 1995 and September 30, 1996. That tax loss
carryforward is available to reduce federal income taxes, if any, through 2010
and to reduce state income taxes over various carryforward periods. Based on the
Company's historical and current pretax earnings, management believes that the
recorded deferred tax assets, net of valuation allowance, will be realized.
FOREIGN OPERATIONS
The Company has significant operations outside the United States and
Canada, located principally in Western Europe. During the year ended December
31, 1995 and the nine months ended September 30, 1996, the Company generated
revenues from sales outside of the United States and Canada of $83.3 million and
$57.4 million, respectively, representing approximately 36% and 38% of the
Company's total revenues during such periods. See "Risk Factors -- Foreign
Operations" and Note 8 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
When appropriate, the Company enters into foreign exchange contracts to
hedge its foreign exchange exposure. The objective of the hedging program is to
manage the risk of adverse cash flow due to fluctuations in foreign currencies.
At December 31, 1995 and September 30, 1996, the Company had approximately $36.2
million and $12.9 million in foreign exchange forward contracts outstanding,
respectively. See Note 1 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
ENVIRONMENTAL
As a result of inspections by the ADEQ, the Company became aware of
chromium contamination beneath McCulloch's plating operations in Lake Havasu
City, Arizona. See "Business -- Environmental" and "Risk
Factors -- Environmental." In January 1995, McCulloch entered into a consent
order with the ADEQ pursuant to which McCulloch has begun to remediate the site.
In connection with the McCulloch disposition, the Company agreed to indemnify
the purchaser for environmental liabilities with respect to all circumstances
existing prior to the closing of the McCulloch disposition, other than (i) the
first $1.25 million and (ii) 50% of the second $1.25 million of environmental
liabilities stemming from chromium contamination beneath McCulloch's plating
operations in Lake Havasu City, Arizona. Since the closing of the McCulloch
disposition,
37
<PAGE> 41
McCulloch has discovered two distinct incidences of contamination at the Lake
Havasu City facility in addition to the chromium contamination: (i) low
concentrations of trichloroethylene in groundwater and (ii) gasoline-related
substances (i.e., benzene, toluene, ethylbenzene and xylene) down-gradient of
the site where two underground gasoline storage tanks were removed in 1992. The
sites are currently under investigation by McCulloch and the ADEQ, and
additional groundwater sampling has been proposed. Although the Company has a
reserve to satisfy current and potential environmental claims, there can be no
assurance that such reserve will be sufficient to cover all charges with respect
to the Company's environmental indemnity obligations or that the Company will
have adequate resources to satisfy McCulloch's claims under the environmental
indemnity. If the Company fails to honor its contractual obligations, it could
be subject to a lawsuit seeking specific performance or other remedies. See
"Risk Factors -- Environmental" and "McCulloch Disposition."
RAW MATERIALS
The Company's operating profit margins are sensitive to the price of raw
materials, particularly copper, plastic resin and corrugated boxes. From January
1, 1994 through September 30, 1995, the Company experienced a 23% increase in
the price of copper, a 26% increase in the price of plastic resin and a 33%
increase in the price of corrugated paper, and the Company instituted a price
increase to offset these higher costs partially. At September 30, 1996, the
prices of these raw materials had moderated such that they were comparable to
prices existing at January 1, 1994. The Company does not believe that future raw
material price increases in excess of price increases that may be obtained from
customers will have a materially adverse effect on its operations taken as a
whole. See, however, "Risk Factors -- Cost of Raw Materials." Although
historically the Company has not hedged the prices of its raw materials,
management is in the early stages of evaluating the benefits of hedging some of
its raw materials purchases with the use of futures contracts. See
"Business -- Raw Materials and Suppliers."
SEASONALITY
Because the Company's business is largely dependent on the retail industry,
seasonality and cyclical trends in the retail industry can affect the Company's
results of operations. The Company typically generates the largest percentage of
its annual revenues in September, October and November in connection with the
Christmas season. Correspondingly, working capital needs usually peak during
August, September and October as the Company increases production in
anticipation of increased sales. The Company's sales as a percentage of total
annual sales in the three-month periods ended November 30, 1993, 1994 and 1995
were 29%, 32% and 30%, respectively.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS No. 121")
in March 1995. SFAS No. 121 is mandatory with respect to fiscal years beginning
after December 15, 1995; however, the Company does not expect that complying
with SFAS No. 121 will have a significant effect on the Company's consolidated
financial statements. In addition, FASB has issued SFAS No. 123, "Accounting for
Stock-Based Compensation," and SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," neither of
which are expected to have a significant effect on the Company's consolidated
financial statements. The AICPA has issued Statement of Position 96-1,
"Environmental Remediation Liabilities" which is required to be adopted for the
fiscal year ending December 31, 1997 and is not expected to have a significant
effect on the Company's consolidated financial statements.
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<PAGE> 42
BUSINESS
OVERVIEW
Shop Vac believes that it is a leading worldwide manufacturer and marketer
of consumer and industrial wet/dry vacuum cleaners and accessories. The Company
estimates that its products account for over half of the domestic consumer
wet/dry vacuum market, with almost twice the market share of its closest
competitor. The Company also markets its wet/dry vacuums internationally in over
70 countries under the Aqua-Vac(R) and Goblin(R) brand names. Based upon the
Company's knowledge and experience in the industry, the Company believes that
the Aqua-Vac(R) line of wet/dry vacuums is a leading brand in Western Europe.
Shop Vac believes that it has maintained a leading worldwide market position by
promoting strong brand awareness and product quality, building and maintaining
close relationships with its customers and, in North America, utilizing
cost-effective vertically integrated manufacturing processes.
In 1956, Martin Miller, the founder of the Company, pioneered the original
concept of a shop vacuum. The Company has maintained its leadership position in
North America since the Company introduced the wet/dry vacuum to the consumer
market under the Shop-Vac(R) brand name in the late 1960s. In the early 1970s,
Mr. Miller's sons, Jonathan and Matthew, the current presidents of the Company's
North American and European divisions, respectively, joined the Company and
began to expand operations both domestically and internationally. In the early
1980s, in order to increase production efficiency and to minimize costs, the
Company made strategic decisions to expand the manufacturing capability of its
domestic operations by establishing operations to produce motors and plastic
parts for the Company's products and creating a dedicated in-house sales force.
The Company also expanded its international operations, particularly in Europe,
in order to take advantage of the growing European demand for its products and
to pursue distribution in developing markets in Africa, the Middle East and
Asia.
The Company produces a comprehensive line of wet/dry vacuums in various
combinations of tank size, motor horsepower and accessories, which are designed
for consumer, industrial/commercial and professional needs. Features include
motors ranging from 1.0 to 5.0 peak horsepower, tank sizes ranging from one to
55 gallons, detachable hand-held blowers and a variety of accessories such as
extension wands, brushes and nozzles. The Company designs most of its products
for the consumer market, which accounted for approximately 90% of the Company's
net sales in 1995. The Company introduced into the North American market its new
corded, portable wet/dry vacuum, the Shop-Vac 1x1(R), in April 1994, and the
QSP(R) (Quiet Super Power) line of wet/dry vacuums, offering easier handling and
a quieter operation without sacrificing motor power, in April 1995. In Europe,
the Company also manufactures and markets a full line of floor care products in
addition to its wet/dry vacuums, including conventional vacuums, carpet cleaners
and steam cleaners to selected markets. In 1991, the Synchro(R) line of vacuums
was introduced in Europe. The Synchro(R) includes an adaptor that enables power
tools, such as electric saws and sanders equipped with dust extraction outlets,
to be connected directly to the vacuum. In 1995, the Multipro(R), a new "quiet"
operating wet/dry vacuum and carpet shampooer, was introduced in Europe. As a
result of the introduction of these new products and other factors, the Company
has maintained and strengthened its leading market position.
Shop Vac's product design, operations, sales and marketing are managed in
two groups: (i) North America, which is comprised of the United States, Canada,
Latin America and Australia, and (ii) Europe, which is comprised of Europe and
the remaining countries in which the Company does business. The Company sells
its products in North America through its own direct sales force primarily
through national and regional mass merchandisers, home centers, hardware chains,
warehouse clubs and industrial distributors. The Company's major North American
customers include Ace Hardware, Canadian Tire, W.W. Grainger, Home Depot, Kmart
and Wal-Mart. The Company sells its products in the more fragmented European
market primarily through home centers and electrical appliance chains, as well
as through catalogs. Shop Vac's customers in Europe include home centers, such
as Homebase Limited ("Homebase") in the United Kingdom, Castorama in France and
Baus Handelsges A.G. ("Bauhaus") in Germany; electrical appliance chains, such
as Curry's in the United Kingdom and ETS Darty et Fils ("Darty") in France;
catalog showrooms, such as Argos in the United Kingdom; mail order catalogs,
such as GUS Home Shopping Limited ("GUS") in the United Kingdom, S.A. La Redoute
France ("La Redoute") in France and Otto in
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<PAGE> 43
Germany; and hypermarkets, such as Carrefour in France and MGE Einkauf G.m.b.H.
(the "Metro Group") in Germany.
COMPETITIVE STRENGTHS
Management believes that the Company enjoys the following competitive
advantages:
Strong Brand Name Recognition. The Shop-Vac(R) brand name has been
synonymous in North America with the wet/dry vacuum since the Company introduced
the wet/dry vacuum cleaner to the consumer market in the late 1960s. Independent
market research indicates that awareness of the Shop-Vac(R) brand name among
potential wet/dry vacuum purchasers in the United States has averaged
approximately 90% since 1987. The Company's international brands, Aqua-Vac(R)
and Goblin(R) also have strong brand name recognition in their respective
markets. The Company has built and maintained its well-recognized brand name by
manufacturing and selling high quality, powerful products at competitive prices.
Market Leadership. The Shop-Vac(R) brand image has helped the Company
achieve and maintain the leading position in its major markets. The Company
estimates that its products currently account for more than half of the $275
million domestic consumer wet/dry vacuum industry, with almost twice the market
share of its largest domestic competitor. In addition, the Aqua-Vac(R) brand of
wet/dry vacuums is a leading brand in Western Europe. See "Risk
Factors -- Competition" and " -- Competition."
Established Customer Relationships and Extensive Distribution Network. The
Company has been the primary supplier of wet/dry vacuums to its top ten
customers in the United States and Canada for an average of over 17 years. In
addition, the Company believes that its products currently account for virtually
all of the wet/dry vacuum business of seven of its top ten customers in the
United States and Canada, and many retailers carry the Company's products at all
of their locations. Although the European market is more fragmented than in the
United States and Canada, the Company benefits from its well-established
relationships with major retailers in various Western European countries. The
Company estimates that its products are distributed through over 25,000 retail
outlets in North America and over 5,000 retail outlets in Europe.
Distinct Product Position. In North America, the Company's wet/dry
products are positioned by retailers as utility vacuums and, therefore, are sold
through hardware, rather than floor care, departments. As a result, in North
America Shop-Vac(R)'s wet/dry products do not compete with conventional vacuums
for retailer shelf space. In addition, the Company enjoys diversified
distribution through hardware chains and home centers, as well as through mass
merchants. As a hardware product, Shop Vac has benefited from the trend towards
"do-it-yourself" work by homeowners and the growth of national home center
chains. A similar trend is developing in Europe which the Company believes will
enhance its sales in Europe in light of the Company's relationships with
European home center chains.
Brand Loyalty. Management estimates that approximately half of the
Company's domestic sales in 1995 were to customers who, at that time, owned or
had previously owned a Shop-Vac(R). The Company estimates that it has an
installed base of approximately 18.0 million wet/dry vacuum units in North
America and approximately 3.5 million units in Europe, with these Shop-Vac(R)
and Aqua-Vac(R) owners being likely to purchase new or replacement Shop-Vac(R)
and Aqua-Vac(R) vacuums in the future. In addition, the Company's installed base
results in Shop-Vac(R) and Aqua-Vac(R) owners purchasing replacement parts,
filters and other related products, which accounted for approximately 10% of net
sales in 1995.
Low Cost Producer. The Company has over 25 years of experience in
developing, manufacturing and continually enhancing its line of wet/dry vacuum
cleaners and related products. To maximize profitability, the Company is
vertically integrated in North America. By controlling all major aspects of the
manufacturing process through its integrated facilities in North America, the
Company is able to control product quality and reduce lead times and delivery
costs. In addition, as a vertically integrated manufacturer, the Company is able
to design new products and enhance existing products in order to facilitate a
simplified manufacturing process, thereby reducing costs. Since the European
market is more fragmented, the Company outsources the majority
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<PAGE> 44
of its components, which allows for the added flexibility that is necessary to
offer smaller and more diverse product offerings for sale in various countries.
Family Management and Ownership. The Company is owned and operated by
Jonathan and Matthew Miller, the sons of the Company's founder. Jonathan Miller,
the Chairman of the Board and Chief Executive Officer of the Company and the
President of the North American Group, has worked at the Company or its
predecessor, Craftool Company, since 1970. Matthew Miller, the President of the
European Group, has worked at the Company since 1975. The Miller family
collectively owns all of the capital stock of the Company, which has been
pledged as collateral for the Notes. See "Risk Factors -- Control by Principal
Stockholders; Dependence on Key Personnel," "Principal Stockholders," and
"Description of Exchange Notes -- Security."
BUSINESS STRATEGY
The Company's business strategy consists of the following key elements:
Emphasize Improved Profitability and Cash Flow. Following the decision to
sell McCulloch, the Company focused on its core operations and initiated a
series of operational improvements targeted at reducing expenses and increasing
cash flow. These improvements include consolidation of certain manufacturing
operations, administrative personnel reductions, improved inventory control and
implementation of manufacturing innovations and automation. For example, in
1995, the Company began using an automated liquid coloring system instead of a
manual mixing process and converted certain plastic parts from thermal plastic
to a lower cost thermoset material. In 1996, the Company consolidated its
plastic molding facility formerly in Norwich, New York into its Canton,
Pennsylvania operations and has initiated consolidation of a small manufacturing
facility in France into its European manufacturing operations in Ireland. The
benefits of these programs and the impact of certain other factors are evident
in the Company's recent operating results, including gross margin improvement
from 23.0% to 24.7% and a reduction in selling, general and administrative
expenses as a percentage of net sales from 16.7% to 15.9% for the nine months
ended September 30, 1995 and 1996, in each case, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
Maintain Leading Market Position. The Company intends to continue to
capitalize on the strengths of its brands and maintain a worldwide market
leadership position. In this capacity, the Company will continue to maintain
close relationships with its customers and manufacture quality products which
lead to high levels of customer satisfaction.
Expand International Sales. The Company intends to continue to leverage
the Shop-Vac(R) and Aqua-Vac(R)brand names to achieve global distribution of
products and product line extensions. The Company intends to increase its
advertising and promotional activity to broaden international awareness of its
products. As part of this strategy, the Company is seeking to develop
independent distribution channels in countries where it currently does not have
a major presence. In addition, from time to time, the Company coordinates with
its major customers' expansion into new markets. For example, while Shop Vac's
products have been sold in Mexico in the past, the Company intends to expand its
presence in Mexico and the rest of Latin America alongside Wal-Mart, its
longtime customer. See "Risk Factors -- Foreign Operations."
Emphasize Product Innovation. The Company seeks to expand the wet/dry
vacuum cleaner product category by introducing new products under the
Shop-Vac(R) and Aqua-Vac(R) brand names and continually upgrading existing
products in response to consumer preferences, changing market dynamics and
technological advancements. For example, in 1994, the Company successfully
introduced into the North American market the Shop-Vac 1x1(R), a smaller
light-weight hand-held wet/dry vacuum intended for use in the home. In addition,
in 1995, the Company began to offer the QSP(R)(Quiet Super Power) line of
wet/dry vacuums which offer easier handling and quieter operations without
sacrificing motor power. The QSP(R) is the only "quiet" wet/dry vacuum in the
market, and consumer response has been very favorable. In Europe, the Synchro(R)
line of vacuums was introduced in 1991. The Synchro(R) includes an adaptor that
enables power tools, such as electric saws and sanders equipped with dust
extraction outlets, to be connected directly to the
41
<PAGE> 45
vacuum. In 1995, the new "quiet" operating wet/dry vacuum and carpet shampooer,
the Multipro(R), was introduced in Europe.
INDUSTRY OVERVIEW
The consumer wet/dry vacuum cleaner was introduced by the Company
commercially in the late 1960s. A wet/dry vacuum differs from a conventional
household vacuum primarily because (i) the wet/dry vacuum is specially designed
to allow debris entering the vacuum to bypass the motor, enabling the wet/dry
vacuum to intake water and heavy debris such as glass and nails; (ii) the
wet/dry vacuum utilizes a strong, concentrated suction to clean, as opposed to
an upright vacuum, which relies on a "beater bar" to agitate debris; and (iii)
the wet/dry vacuum does not require many of the expensive parts (such as a
beater bar, sophisticated wheels and canister cord rewinds) of a conventional
vacuum, thus significantly lowering manufacturing costs and enabling the wet/dry
product to retail at a substantially lower price.
North America
In North America, the consumer wet/dry vacuum is positioned as a utility
vacuum and is sold through hardware, rather than floor care departments. As a
result, the wet/dry product does not compete for retailer shelf space with
conventional vacuum cleaners. Generally viewed as a secondary household vacuum,
the wet/dry product is able to perform heavier cleaning functions in areas such
as the basement, garage and workshop that the standard vacuum cannot attempt.
Primary users of the consumer wet/dry vacuum are homeowners, many of whom
undertake "do-it-yourself" projects in their garages or workshops. According to
industry data, approximately half of the wet/dry vacuums sold in the United
States in 1995 were sold to first time purchasers. Based on informal marketing
surveys and the Company's experience, management believes that repeat customers
generally display a substantial amount of brand loyalty, typically purchasing
additional wet/dry products from the same manufacturer.
The Company estimates that the total market in the United States and Canada
for consumer wet/dry vacuum cleaners accounted for approximately $275.0 million
in annual sales in 1995. Consumer wet/dry vacuums are typically distributed and
sold through mass merchandise retailers, such as Kmart, Target Stores ("Target")
and Wal-Mart; home centers, such as Builder's Square, Hechinger Stores Company
("Hechinger") and Home Depot; warehouse clubs, such as Price Costco and Sam's
Club; hardware stores, such as Ace Hardware, Cotter & Company ("True Value
Hardware") and ServiStar Corporation ("ServiStar"). Over the last decade, the
expansion of mass merchandisers and home centers has contributed to the
consolidation of the retail industry. The proliferation of mass merchants and
home centers throughout the United States and, to a lesser extent,
internationally has led to a substantial increase in certain consumer purchases,
such as the wet/dry vacuum, at such locations and a decrease in such purchases
at less well-recognized and less accessible catalog showrooms and warehouse
clubs.
International
In Europe and the Middle East, the Company has positioned its products in
response to the fragmentation of that market and differing consumer expectations
and demands. Generally, consumers in Europe own only one vacuum because of space
limitations, as well as a lack of garages and basements. Consequently, in
European markets, the Company emphasizes the practical utility of its products
by offering additional features and accessories. As the European Community
continues to exert its influence over cross-border trading in Europe, the
fragmentation of that market should decrease. Historically, sales in Europe have
been conducted through local distributorships that adapted to local requirements
and consumer expectations. As fragmentation decreases and the need for local
distributors diminishes accordingly, manufacturers of consumer products are more
likely to sell directly to retailers to bypass costly middlemen and enhance
their competitive positions throughout Europe. See "-- Products" and "-- Sales
and Marketing."
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<PAGE> 46
PRODUCTS
North America
In North America, the Company offers the industry's broadest line of
consumer and industrial wet/dry vacuums, manufacturing 46 consumer models and
approximately 49 industrial models, in addition to a full line of accessories.
The table below sets forth an overview of the Company's wet/dry vacuum products
offered in North America, as well as the primary distribution channels, target
markets and product categories:
<TABLE>
<CAPTION>
PRIMARY
SIZE/POWER MODEL(S) DISTRIBUTION CHANNEL TARGET MARKET
- -------------------- ---------- ------------------------ ----------------
<S> <C> <C> <C>
1 Gallon Hand-held Mass Merchants Consumer
1.0 Horsepower Home Centers
Hardware Chains
Industrial Distributors
5-25 Gallon Original Mass Merchants Consumer
1.25-5.0 Horsepower QSP(R) Home Centers
Hardware Chains
Industrial Distributors
Warehouse Clubs
10-16 Gallon Original Home Centers Contractor
3.0-5.0 Horsepower Industrial Distributors
5-55 Gallon Original Industrial Distributors Industrial
1.7-3.5 Horsepower
</TABLE>
Consumer Line. The Company's consumer line of wet/dry products accounts
for the majority of its sales, totalling approximately 86% of 1995 net sales in
the United States (including wet/dry accessories). The consumer line consists of
46 models, differing primarily in size, motor power and included accessories,
which are marketed at suggested manufacturers' retail prices of between $29.99
and $129.99. The storage capacity of the Company's consumer vacuums ranges from
one gallon to 25 gallons, motor power varies from 1.0 to 5.0 peak horsepower,
and various accessories include filters, brushes and hoses. Certain of Shop
Vac's products include detachable motors that can be used as leaf blowers in
conjunction with a nozzle accessory. The hand-held blower allows easy clean-up
of leaves, grass and other light debris from sidewalks, pool areas, decks and
patios.
Industrial/Commercial Line. The industrial line, comprised of 49 models
and marketed primarily to heavier users such as factories, warehouses and
hospitals, features more powerful, longer-lasting motors and larger capacity
tanks (ranging from five to 55 gallons) made of plastic, metal or stainless
steel. The units are equipped with heavy-duty carts for easy mobility and
additional accessories and filtration devices. The Company's industrial wet/dry
vacuums are manufactured for daily use and have a longer average useful life
than the Company's consumer products. The industrial line, which includes
products manufactured for W.W. Grainger under the Dayton brand name, accounted
for approximately 11% of the Company's net sales in the United States in 1995.
Contractor Line. The contractor line of wet/dry vacuums, marketed
primarily to small industrial businesses, independent contractors and
experienced woodworkers, offers larger capacity metal or stainless steel tanks,
more powerful motors and better filtration than the consumer line, and comes
equipped with heavy-duty carts to facilitate mobility. This line of products is
primarily sold in home centers such as Home Depot and warehouse clubs such as
Sam's Club and Price Costco. The contractor line accounted for approximately 3%
of the Company's net sales in the United States in 1995.
Private Label. The Company produces wet/dry products for other
manufacturers or retailers under such entity's brand label. Customers include
Makita U.S.A., Inc., Milwaukee Electric Tool Corporation and Sioux Tool, Inc.
The Company also sells vacuum components to other manufacturers such as Parts
Company of America and Tennant Co. Private label sales accounted for
approximately 1% of the Company's net sales in the United States in 1995.
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<PAGE> 47
Accessories. The Company offers the industry's widest range of wet/dry
vacuum accessories, manufacturing 125 stock keeping units ("SKUs") aimed at
increasing the versatility of its products. Accessories include replacement
parts such as filters and hoses and additional tools such as brushes, wands,
nozzles and crevice tools which can be used in conjunction with the basic unit.
Customers may purchase accessories from retail locations or order them directly
from the Company. Accessory sales represented approximately 10% of the Company's
net sales in the United States in 1995.
Industrial Sweepers. The Company produces a line of three motorized
"walk-behind" sweepers for W.W. Grainger, and manufactures a manual push sweeper
for sale under the Shop-Vac(R) brand name and for certain private labels. These
sweepers are primarily used to clean aisles in factories and warehouses.
Europe and International
The Company conducts most of its European operations under the trade names
of Aqua-Vac(R) and Goblin(R). Goblin(R) is an established British conventional
vacuum brand name that the Company purchased in 1984. The table below sets forth
an overview of the Company's product offerings in Europe, as well as the primary
distribution channels and target markets:
<TABLE>
<CAPTION>
PRIMARY
PRODUCT SIZE/POWER MODELS DISTRIBUTION CHANNEL TARGET MARKET
- --------------------- ---------------- ----------------- ---------------------------- --------------
<S> <C> <C> <C> <C>
Wet/Dry 15-30 liter Original Home Centers Consumer
Vacuum Cleaners 900-1100 watts Electrical Appliance Chains Do-It-Yourself
Catalog Showrooms
Mail Order Catalogs
Hypermarkets
18-30 liter Quiet Operations Home Centers Domestic
1200-1400 watts Electrical Appliance Chains Vacuum Users
Step-up
Do-It-Yourself
20-60 liter Industrial Home Centers Contractors
1200-1400 watts Synchro(R) Industrial Outlets
Catalog Showrooms
20-30 liter Carpet Electrical Appliance Chains Consumer
1000-1100 watts Shampooer Commercial
Steam Cleaners 0.5-4.0 Steamatic(R) Home Centers Consumer
bar pressure Mondial(R) Electrical Appliance Chains Do-It-Yourself
Catalog Showrooms
Mail Order Catalogs
Hypermarkets
Domestic Vacuum 4 liter Uprights Electrical Appliance Chains Consumer
Cleaners dust capacity Catalog Showrooms
(Sold in the United 450-475 watts Mail Order Catalogs
Kingdom, Germany and Hypermarkets
Austria)
3-5 liter Cylinders Electrical Appliance Chains Consumer
dust capacity (Canisters) Catalog Showrooms
1000-1400 watts Mail Order Catalogs
Hypermarkets
Rechargeable/ Handheld Electrical Appliance Chains Consumer
corded Catalog Showrooms
150-250 watts Mail Order Catalogs
Hypermarkets
</TABLE>
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<PAGE> 48
Wet/Dry Vacuum. In Europe, the Company produces and distributes a variety
of wet/dry vacuums under the AquaVac(R) brand name to the consumer and
industrial/commercial markets. The Company's wet/dry vacuums sold
internationally generally contain noise dampening features similar to those in
the QSP(R).
Conventional Vacuum Lines. The Company also offers a variety of
conventional and canister vacuums under the Aqua-Vac(R) and Goblin(R) brand
names, differing primarily in size, power and enhancements such as filtration,
cord rewinds and internal tool storage.
Steam Cleaners and Carpet Cleaners. The Company also manufactures and
markets a full line of steam cleaners, which clean items and areas such as
carpets, upholstery, furniture and floor surfaces using powerful steam
generators rather than detergents, solvents or abrasive cleaners. Features
include varying steam power, precise control of steam output and a wide range of
accessories such as additional nozzles and irons. The Company also offers two
types of carpet cleaners: a "3-in-1" integrated cleaner with pure dry and
wet/dry capacity as well as an internal reservoir and separate pump motor to
facilitate carpet shampooing; and an attachment for a wet/dry vacuum that
enables the product to perform light carpet cleaning.
Other Product Lines. The Company sells hand-held vacuums, both corded and
rechargeable, which are purchased by the Company from independent sources.
Continuous Product Innovation
From time to time, the Company enhances its product lines and adds
innovative features to respond to customer feedback, which adds to the Company's
loyal customer base, appeals to additional market segments and expands the
wet/dry vacuum market.
In 1991, the Company introduced the Synchro(R) line of vacuums in Europe.
The Synchro(R) was designed for the do-it-yourself market and professional
tradesmen. It includes an adapter that enables power tools, such as electric
saws and sanders that have dust extraction outlets, to be connected to the
vacuum. Power tools are plugged into a socket on the Synchro(R) instead of a
wall socket, and the Synchro(R) unit is activated by the trigger on the attached
power tool.
In April 1994, the Company introduced the Shop-Vac 1x1(R) portable wet/dry
vacuum product, which is targeted at the portable vacuum market. The Shop-Vac
1x1(R), which has a capacity of one gallon and runs on a 1.0 peak horsepower
motor, is currently the only corded portable wet/dry vacuum in the market. Most
of the Company's major retail customers offer the Shop-Vac 1x1(R) for sale.
Consumer response to the Shop-Vac 1x1(R) has been very favorable. During 1995
and the first nine months of 1996, Shop-Vac 1x1(R) sales accounted for 15% and
10% of total North American sales, respectively.
In April 1995, the Company introduced its new line of QSP(R) (Quiet Super
Power) wet/dry vacuums. The QSP(R) is the only "quiet" wet/dry vacuum in the
market and was designed in response to customer demand for a quieter product.
Products in the QSP(R) line offer a variety of enhancements to the Company's
original wet/dry vacuum, including noise dampening insulation; more powerful
motors in its largest capacity models; top and side handles for ease of
maneuvering; more stable tanks; tool storage attachments; and a more modern
design profile, and are generally slightly higher priced than the Company's
original line. The Company has coordinated closely with its major retail
customers to introduce wet/dry vacuums in the QSP(R) line. Consumer response to
the QSP(R) product has been very favorable. In connection with the launch of the
QSP(R) product line in April 1995, the Company has also updated its original
model to include some of the design features of the QSP(R). During 1995 and the
first nine months of 1996, QSP(R) sales represented 23% and 28% of total North
American sales, respectively.
In 1995, the Company also introduced the Multipro(R), a new "quiet"
operating wet/dry vacuum and carpet shampooer, in Europe. By incorporating noise
dampening technology into a versatile new product, the Company is offering a
product tailored to the European market which focuses on practical utility
combined with added features and accessories.
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<PAGE> 49
SALES AND MARKETING
General
As of September 30, 1996, the Company had 20 sales and marketing employees
in North America and 56 sales and marketing employees servicing Europe and other
international markets, all of whom concentrated exclusively on the promotion and
sale of the Company's products and the development and execution of marketing
strategies.
Shop Vac's sales and marketing is enhanced by the Company's strong
historical ties with its major U.S. customers, all of whom are serviced by the
Company's in-house sales force. These employees work with the national accounts
to plan inventory purchases, promotional activities and programs to increase
demand for Shop Vac products. Private label customers are serviced similarly.
All other customers are serviced by 11 field sales employees covering the United
States. Hardware wholesale accounts are also called on by the field sales
personnel, and hardware sales activity is coordinated by the Company's Director
of Hardware Industry Sales to ensure uniformity.
In Europe, sales and marketing have historically been conducted through
local distribution companies in each of the United Kingdom, France, Germany,
Austria, Hungary and the Netherlands. As fragmentation of the European market
decreases, the Company is consolidating its distribution operations and
expanding its direct sales to retailers, thereby reducing its distribution costs
and enhancing Shop Vac's competitive position. The Company will continue to
service its longstanding customers and is strengthening its ties to them through
a variety of methods, including maintaining a high level of product quality,
rapid delivery, superior after-sale service and selected private label
production. In addition, the Company is also pursuing opportunities in other
markets where its brand names and reputation are less well known, such as
Poland, Russia, Turkey and the Far East through its export sales force.
North America
Consumer Products. Shop Vac sells its products in the United States,
Canada, Mexico and Australia/New Zealand (considered to be part of the Company's
North American operations for administrative purposes) through a direct sales
force of approximately 20 people. This sales force focuses on distribution of
the Company's products to the end consumer through mass merchandisers, such as
Kmart, Target and Wal-Mart; home centers, such as Builder's Square, Hechinger
and Home Depot; hardware chains, such as Ace Hardware, ServiStar and True Value
Hardware; and warehouse clubs, such as B.J.'s Wholesale Club, Price Costco and
Sam's Club. The Company estimates that its product is carried in over 9,000 mass
merchant locations, over 8,000 hardware stores, over 2,000 home centers
nationwide and approximately 6,000 retail outlets in Canada.
Through its large retail customer base, the Company has achieved extensive
penetration in the wet/dry vacuum market. The Company accounts for virtually all
of the wet/dry vacuum business of seven of its top ten customers, and many
retailers carry the Company's products at all of their locations. The Company
has sustained strong relationships with many of its distributors for a number of
years, doing business with Kmart and W.W. Grainger since 1969, True Value
Hardware since 1970, Ace Hardware since 1977 and Wal-Mart since 1978. The
Company has been recognized for its quality products and service during the last
seven years with "Vendor of the Year" or similar awards from a number of major
retailers, including Canadian Tire, Kmart and Wal-Mart.
In order to support its sales efforts and its well-recognized brand name,
the Company engages an outside advertising agency for creative direction,
production of various television commercials and media placement. The Company
also participates in various co-operative advertising programs with its
retailers to create flyers, newspaper advertisements, radio spots, catalogs,
television commercials, billboards, store handouts and coupons. The Company
actively promotes its product through activities such as arranging "end caps" in
retail stores, offering bonus packages for particular items or events, offering
discounts to correspond with store openings, organizing trade show displays and
creating rebate programs. The Company also conducts "product
46
<PAGE> 50
knowledge" sessions with retail store personnel and produces videos, guides and
point-of-purchase materials to educate retailers and consumers as to the
features of the Company's products.
Mass Merchandisers. The Company has benefited from the recent explosion in
the growth of mass merchandisers, such as Kmart, Target and Wal-Mart, through
which the Company sells a significant portion of its consumer products.
Typically, these retailers work with the Company to develop selling programs for
all of their stores which include five to six SKUs of the wet/dry product and a
variety of accessories. The proliferation of mass merchants throughout the
United States and, to a lesser extent, internationally has led to a substantial
increase in certain consumer purchases, such as the wet/dry vacuum, at such
locations. The Company believes that this trend will continue to contribute to
its success as mass merchants continue to expand their operations and distribute
Shop Vac products to a broader customer base through their extensive networks of
well-recognized retail locations. Due to the well-recognized Shop-Vac(R) brand
name, the Company's products often serve as focal points in mass merchants'
in-store displays and advertising circulars.
Home Centers/Hardware Trade. The Company actively markets its products to
home centers and hardware chains such as Ace Hardware, Builder's Square,
Canadian Tire, Home Depot and ServiStar. Hardware retailers often sell packages
containing a wet/dry vacuum and additional tools designed to attract the more
specialized purchaser. Home center stores tend to carry the Company's larger
vacuums to service their customer base.
Warehouse Clubs. The Company markets selected models through warehouse
clubs which are membership only retail outlets. These retailers include B.J.'s.
Wholesale Club, Sam's Club and Price Costco.
Industrial/Commercial Products. The Company markets its
industrial/commercial line of vacuums primarily for use in factories, hospitals,
warehouses and other similar facilities with heavier cleaning needs. These
products are typically sold through industrial distributors, such as W.W.
Grainger and McMaster-Carr Supply Company, and industrial toolhouses. The
Company estimates that its commercial products are carried in over 1,000
industrial supply locations nationwide. The Company sells a majority of its
industrial/commercial products, manufactured with the "Dayton" brand name, to
W.W. Grainger, which in turn markets the wet/dry products through a nationwide
network of distributors and by catalog.
Service. The Company operates service centers at its distribution
facilities and provides additional warranty and nonwarranty service to its
customers through an extensive network of 450 servicing dealers throughout North
America. The Company includes a two-year full warranty with each of its consumer
vacuums and a similar one-year warranty with each of its industrial/commercial
and contractor vacuums.
Distribution. Most of the Shop Vac products sold in the United States are
shipped from the Company's distribution center in Williamsport, Pennsylvania.
The Company distributes to its western United States customers through a leased
distribution facility in Cerritos, California. The Company ships most of its
customers' orders by independent common carrier, although several of the
Company's major customers, including Wal-Mart, pick up their shipments utilizing
their own fleet of trucks. The centralization of its distribution process
enables the Company to process and fill orders rapidly. The Company also has
distribution centers in Burlington, Ontario; Melbourne, Australia; and Auckland,
New Zealand.
The Company services approximately 50 customers, including Home Depot,
Kmart, Wal-Mart, and W.W. Grainger through the use of Electronic Data
Interchange ("EDI"). EDI transmissions of orders and invoices enable the Company
to provide its time-sensitive customers with rapid, efficient service.
International
Europe. The Company markets its products in Europe primarily through home
centers, electrical appliance retail chains, mail order/catalog showrooms and
hypermarkets, which are similar to superstores in
47
<PAGE> 51
the United States. Industrial products are sold through industrial mail order
catalogs or hardware stores. The Company's major customers in the United
Kingdom, France and Germany include:
<TABLE>
<CAPTION>
PRINCIPAL CUSTOMERS
------------------------------------------
SALES OUTLET UNITED KINGDOM FRANCE GERMANY
---------------------------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Home Centers.................................. Homebase Castorama Bauhaus
Electrical Appliance Chains................... Curry's Darty --
Catalog Showrooms............................. Argos -- --
Mail Order Catalogs........................... GUS La Redoute Otto
Hypermarkets.................................. -- Carrefour Metro Group
</TABLE>
The above customers contributed approximately 11% and 13% of the Company's
total revenues for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively.
As the European Community continues to exert its influence over
cross-border trading in Europe, the Company expects that the fragmentation in
that market should decrease. Although the Company has historically sold its
products in Europe through local distributorships, as market fragmentation
decreases in Europe, the Company intends to shift its focus to selling directly
to retailers, thereby reducing distribution costs.
United Kingdom. Historically, the Company has been the leading supplier of
wet/dry vacuums in the United Kingdom and enjoyed a market share in 1995 of
approximately 90% and as a major player in the conventional vacuum cleaner
market enjoyed a market share in 1995 of approximately 13%. The Company's
strategy is to focus on its distribution of products through home centers,
electrical appliance chains, catalog showrooms and mail order catalogs. Sales in
the United Kingdom represented approximately 13% of the Company's 1995 net
sales.
Germany, Austria, Hungary and the Netherlands. In 1995, the Company had
approximately 33% and approximately 11% of the wet/dry vacuum and steam cleaner
markets in Germany, respectively, while in Austria, the Company had
approximately 22% and approximately 17% of the wet/dry vacuum and steam cleaner
markets, respectively. In both Germany and Hungary, the Company estimates that
it was the second leading supplier of wet/dry vacuums in those markets. The
Company's strategy in Western Europe is to focus on direct sales relationships
with its major customers, rather than depending upon distributors and other
middlemen and intends to close its distribution operations in these countries.
See "Risk Factors -- Foreign Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Combined sales in Germany, Austria, Hungary and the
Netherlands represented approximately 9% of the Company's 1995 net sales.
France. Generally, the Company sells its wet/dry vacuums and steam
cleaners in the French market through home centers, electrical appliance chains,
mail order catalogs and hypermarkets. Home centers seek to attract customers by
discounting non-food products, while hypermarkets depend on a profit from all
products. Wet/dry vacuums are sold under the Aqua-Vac(R) brand name through
do-it-yourself specialists and under the Goblin(R) brand name through electrical
appliance specialists and hypermarkets. Steam cleaners are sold under
Aqua-Vac(R) and Powersteam(R) brand names through do-it-yourself specialists and
under the Goblin(R) and Steamatic(R) brand names through electrical appliance
specialists and hypermarkets. Sales in France represented approximately 6% of
the Company's 1995 net sales.
Service. Responsiveness and service are important considerations among
European vacuum purchasers and are among the Company's competitive strengths in
that market. The Company currently supports a network of over 300 service agents
in Europe and each subsidiary employs a number of dedicated customer service
representatives. Several of the Company's service agents regularly travel
throughout Europe. The Company enjoys a favorable reputation with respect to the
provision of service in Europe, and has received a high service rating from a
British consumer magazine.
Latin America. The Company exports its wet/dry products to South America
and Central America from its Williamsport facility. Such exports represented
approximately 1% of its 1995 net sales. In order to
48
<PAGE> 52
increase its market share in that region, Shop Vac has recently engaged an
independent distributor in Guadalajara, Mexico to promote and market the
Company's products and is pursuing similar opportunities elsewhere in Latin
America. In addition, the Company has recently entered the Mexican market
alongside Wal-Mart, its long-time customer, and intends to continue a strategy
of coordinating international expansion with its major customers. The Company
also supports service centers in Latin America to service products distributed
through the local retail outlets of certain mass merchandisers, such as Wal-Mart
and Kmart, which purchase such products from the Company in the United States
for sale in Latin America. The Company believes that its exports will continue
to increase as a result of further exposure to these markets through the
proliferation of such mass merchants.
MANUFACTURING
North America
The Company manufactures virtually all of the components of its wet/dry
vacuums sold throughout North America except for metal screws, switches and
packaging cartons. The Company's vertical integration enables it to manufacture
its products rapidly, with fewer concerns regarding supplier delays, and thus
better service its customers' needs by responding promptly to sales orders.
Generally, the Company is able to ship product within 24 hours of a customer's
order, although ordinarily the time between order and shipment ranges from five
to seven days.
The Company's corporate headquarters in Williamsport, Pennsylvania includes
a manufacturing facility at which the Company produces a substantial portion of
the plastic tanks for its consumer products, hoses, caster feet and all of the
components for its industrial metal tank line and reusable dry filters. The
Company manufactures additional plastic components, wheels and ball floats at
its facility in Canton, Pennsylvania. The Company manufactures most of the
motors used in its products at Felchar's Binghamton, New York facility, which is
currently operating at approximately 60% of capacity. The Company plans to
utilize the excess capacity, which reflects, in part, the McCulloch disposition,
by shipping the motors to Shop Vac's European assembly facilities (which
currently purchase motors from unrelated vendors) and/or selling motors to third
parties.
In Williamsport the Company assembles most of the products it sells in the
North American market under both the Shop-Vac(R) brand name and for private
labels, except for the Shop-Vac 1x1(R), which is assembled at the Company's
Canton, Pennsylvania location. The Company distributes its products throughout
the west coast from its facility in Cerritos, California and in Canada through a
distribution center in Burlington, Ontario.
International
The Company manufactures and assembles most of the products that it
distributes throughout Europe at its Tralee, County Kerry, Ireland facility. At
this facility, the Company manufactures hoses and assembles its wet/dry vacuums,
conventional vacuums and carpet cleaners. In addition, the Company intends to
transfer the production of its steam cleaners from its plant in Salindres,
France, which Shop Vac intends to cease operating, to its facility in Ireland in
December 1996. The Company purchases most of the plastic components and all of
the motors used in the manufacture of its European products from local sources.
The Company also purchases a small number of canister vacuums and its hand-held
vacuums from outside sources. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
COMPETITION
The worldwide market for wet/dry products is competitive, and is based on
brand name, price, quality and consumer advertising. The Company has enjoyed the
largest share of the worldwide market for consumer and industrial wet/dry
vacuums and related accessories since the Company introduced the wet/dry vacuum
to the consumer market in the late 1960s. The Company believes that its strong
brand name recognition, competitive pricing (resulting from a vertically
integrated manufacturing process), breadth of product line,
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<PAGE> 53
comprehensive marketing program, long-term relationships with major retail
chains and well-established distribution network provide it with a strong
competitive position. However, some of the Company's competitors are larger and
have greater financial resources than the Company, and there can be no assurance
that such competitors will not substantially increase their resources devoted to
the development and marketing of products competitive with those of the Company.
North America
Historically, there have been relatively few participants in the United
States consumer wet/dry vacuum industry, and prior to 1993, Sears and Genie were
the Company's only significant competitors. Sears has the second largest share
of the consumer wet/dry vacuum market, with an estimated market share of less
than half that of the Company in each of the last five years. Sears offers a
full line of wet/dry vacuums under the "Craftsman" brand name. The Company
believes that Sears' ability to grow market share is limited because Sears
markets its product only through its own retail stores and its mail order
catalog. Thus, the Company competes for the remaining retailers' shelf space
only with Genie, which produces a full line of consumer wet/dry vacuums, and, to
a limited extent, the new entrants into the industry described below.
Since 1993, Hoover, Eureka and Royal have introduced limited lines of
consumer wet/dry vacuum products. The Company has not lost a single major
customer as a result of these new entrants, which, singly and in the aggregate,
have not had a material impact on the Company's market share. Although these
companies have strong brand name recognition in the conventional vacuum market,
wet/dry product tests to date, as well as the Company's sustained market share,
indicate that such recognition does not translate into the wet/dry market, which
is sold as hardware as opposed to floor care and targets a different consumer.
However, upon the entrance of these new competitors into the market, the Company
made a strategic decision to reduce product prices slightly, and, as a result,
the Company experienced a modest decline in gross margin upon implementation of
the new pricing structure in the first quarter of 1993. See "Risk Factors --
Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
International
Competition in the conventional and wet/dry vacuum markets differs in each
European country, although the market for floor care products is generally more
competitive than that for wet/dry products throughout Europe. The Company's
significant competitors include Electrolux Holdings Limited and Hoover, which
offer both conventional and wet/dry vacuums in several European markets, as well
as Rowenta, Royal and Vax Limited in the United Kingdom; and Karcher, Tornado
S.A. and Polti France S.A. in France; and Karcher, Robert Thomas and Einhell,
Hans, A.G. in Germany and Austria. However, most of the Company's competitors
sell their products primarily through electrical appliance outlets and mail
order catalogs, and the Company enjoys a significant percentage of the retail
shelf space for conventional and wet/dry vacuums in the growing home center
retail distribution channel throughout Europe. Competition in Europe is based
more significantly on product enhancement than in the United States, as a result
of the European consumer's general willingness to purchase products perceived as
having additional features.
RAW MATERIALS AND SUPPLIERS
Raw materials purchased represented approximately 56% of the Company's cost
of sales in 1995. The primary raw materials purchased by the Company are resins
for the outside casing of the product, copper for motor production and
corrugated packaging material. Shop Vac has multiple suppliers for each of its
primary raw materials, with many of whom the Company has long-standing trading
relationships. No single supplier accounts for a material amount of the
Company's total raw material purchases. In addition, the Company's agreements
with its largest suppliers guarantee raw material availability and outline
discounts and rebates but do not establish pricing. Moreover, the prices of
certain of the Company's primary raw materials, such as copper, are subject to
fluctuations in the commodities markets, which fluctuations can be substantial
at times. Although historically the Company has not hedged the price of its raw
material commodities, management is
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<PAGE> 54
in the early stages of evaluating the benefits of hedging some of its raw
materials purchases with the use of futures contracts. See "Risk Factors -- Cost
of Raw Materials."
ENVIRONMENTAL
The Company's operations are subject to constantly changing federal, state,
local and foreign regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal of
certain materials, substances and wastes. The Company believes that its
operations are in compliance in all material respects with the terms of all
applicable environmental laws and regulations as currently interpreted. See,
however, "Risk Factors -- Environmental," "McCulloch Disposition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental."
PATENTS AND TRADEMARKS
The Company owns and controls patents, trademarks, trade secrets, trade
names, copyrights and technology know-how, that are of material importance to
its business. The Company's trademarks are registered in the United States and
in a number of foreign countries. The Company also has more than 345 patents and
pending patents worldwide. The Company intends to renew and maintain in a timely
manner those trademarks and patents that are renewable and maintainable and are
deemed important to the business of the Company.
The Company believes that its trademark position is adequately protected.
The Company also believes that its marks are generally well recognized by
consumers of its products and are associated with a high level of quality and
value. Because the Company believes that it is a product innovator, it is the
Company's policy to apply for design and utility patents on those products which
management believes may be of significance to the Company. However, management
believes that the Company's success depends predominantly on its skills in
marketing, distribution and manufacturing rather than on the patented features
of its products.
FACILITIES
The Company owns or leases the following manufacturing, warehouse,
distribution and assembly facilities around the world:
<TABLE>
<CAPTION>
SQUARE OWN/
LOCATION FEET TYPE OF FACILITY LEASE
- --------------------------------------------------- ------- ---------------------------- ------
<S> <C> <C> <C>
UNITED STATES:
Williamsport, Pennsylvania..................... 247,000 Headquarters, manufacturing Own
and assembly
Williamsport, Pennsylvania..................... 103,000 Warehouse Lease
Williamsport, Pennsylvania..................... 50,000 Distribution Lease
Williamsport, Pennsylvania..................... 19,000 Assembly Lease
Canton, Pennsylvania........................... 94,000 Manufacturing Own
Binghamton, New York........................... 102,500 Manufacturing Own
Binghamton, New York........................... 67,500 Manufacturing Own
Norwich, New York.............................. 33,000 Warehouse Own
Cerritos, California........................... 30,850 Distribution Lease
INTERNATIONAL:
* Amsterdam, Netherlands......................... 1,400 Distribution office Lease
Auckland, New Zealand.......................... 3,200 Distribution Lease
* Bochum, Germany................................ 22,935 Distribution Lease
* Budapest, Hungary.............................. 3,000 Distribution Lease
Burlington, Ontario............................ 79,000 Distribution Own
Evry, France................................... 18,623 Distribution Lease
</TABLE>
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<PAGE> 55
<TABLE>
<CAPTION>
SQUARE OWN/
LOCATION FEET TYPE OF FACILITY LEASE
- --------------------------------------------------- ------- ---------------------------- ------
<S> <C> <C> <C>
* Madrid, Spain.................................. 22,750 Distribution Lease
Melbourne, Australia........................... 17,500 Distribution/Assembly Lease
* Salindres, France.............................. 27,000 Manufacturing Own
* Salindres, France.............................. 11,700 Warehouse Lease
Tralee, County Kerry, Ireland.................. 85,000 Manufacturing Own
* Vienna, Austria................................ 6,700 Distribution Lease
Normanton, United Kingdom...................... 60,000 Offices/Distribution Lease
</TABLE>
- ---------------
* To be closed. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
The Company has entered into an option agreement with an independent real
estate developer which entitles the developer to purchase the Company's former
manufacturing facility in Norwich, New York for $675,000. The option agreement
expires on December 19, 1996 and is renewable through June 19, 1998. The
facility is currently used by the Company as a warehouse, and the Company
believes that upon a sale of the facility, the Company will be able to obtain
alternative warehouse space as necessary at reasonable cost.
EMPLOYEES
The Company employed approximately 2,400 persons world-wide as of September
30, 1996. Of these, 1,988 were hourly and 412 were salaried. The hourly work
force is comprised of predominantly unskilled workers, with some semi-skilled
and skilled job classifications. Each of the Company's facilities recruits
hourly personnel from its respective labor market and the Company believes that
the labor market for each facility is favorable. None of the Company's employees
are represented by any labor union, except in Ireland and Australia (in
accordance with local custom), and management believes that the Company's
employee relations are good. Certain of the Company's employees were represented
by the United Auto Workers Union until 1993, when the employees voted to
decertify the union.
LEGAL PROCEEDINGS
McCulloch leased computer hardware and software from American Technologies
Credit, Inc. ("ATC"), and the Company guaranteed that lease. The terms of the
lease have been the subject of litigation. In connection with the McCulloch
disposition, the Company has agreed to indemnify McCulloch for any liability it
may have with respect to the lease. On August 23, 1996, the court granted
judgment on the pleadings in favor of the Company with respect to two of ATC's
causes of action. Subsequently, the Company and ATC have agreed to a settlement
whereby the Company will pay $325,000 in full satisfaction of all claims by ATC.
The Company and Goblin France, the Company's French subsidiary, are each
engaged in litigation with Recorget, a European manufacturer of steam cleaner
components and accessories. Recorget obtained a FF 1.7 million (approximately
$300,000) judgment against Goblin France in 1988, which Goblin France is
currently appealing. Recorget has also sued the Company in 1995 alleging breach
of a distribution agreement and is seeking over FF 36.0 million (approximately
$7.2 million) in damages. Although management firmly believes that Recorget's
claims against the Company are groundless and that the Company will ultimately
prevail, there can be no assurance that the disputes between Recorget and the
Company will not be resolved in favor of Recorget, which could have a material
adverse effect on the Company's financial condition and results of operations.
In addition to the foregoing, the Company is involved in various lawsuits
arising in the normal course of business. In management's opinion, the ultimate
outcome of these lawsuits will not have a material adverse effect on the
Company's financial condition and results of operations.
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<PAGE> 56
MANAGEMENT
DIRECTORS AND EXECUTIVE AND OTHER SIGNIFICANT OFFICERS
The directors and executive and significant other officers of the Company,
their respective ages as of September 30, 1996 and their respective current
positions with the Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -------------------------------------------------
<S> <C> <C>
Jonathan Miller.................. 48 Chairman of the Board, Chief Executive Officer
and President, North American Group
Matthew Miller................... 43 Vice Chairman of the Board and President,
European Group
W. Earl Stogner.................. 56 Executive Vice President & Chief Financial
Officer and Director
Conor Stack...................... 49 Managing Director, European Manufacturing
Larry Tempesco................... 44 Vice President, Sales and Marketing
Michael R. Deschamps............. 40 Vice President, Manufacturing
Thomas Tuohy..................... 51 Vice President, Inventory Planning and Control
Roger D. Arrington............... 45 Vice President, Corporate Analysis
Mark E. Baer..................... 36 Vice President, Electrical Engineering
Joseph W. Crawford............... 52 Vice President and Treasurer
John Lilly....................... 50 Vice President, Information Services
</TABLE>
The terms of office for all of the above officers and directors are until
their successors are chosen and qualified.
- ---------------
Jonathan Miller joined Craftool Company in 1970 as Vice President. Upon
Craftool's merger with the Company, Mr. Miller served as Vice President of
Manufacturing and Engineering until 1981, at which time he was appointed
President of the Shop Vac North American Group. In 1992, Mr. Miller was elected
Chairman of the Board of Directors of the Company. Mr. Miller is the son of
Martin Miller, the founder of the Company, and is the brother of Matthew Miller.
Mr. Miller holds a degree in economics from Rutgers University.
Matthew Miller joined the Company in 1975 as director of sales and
marketing. In 1981, he was appointed to his current position of President of the
Shop Vac European Group. Mr. Miller is the son of Martin Miller, the founder of
the Company and the brother of Jonathan Miller. Mr. Miller holds an
undergraduate degree from Dickinson College and a masters degree from Oxford
University.
W. Earl Stogner joined the Company in 1989 as Vice President and Chief
Financial Officer and was promoted to Executive Vice President and appointed to
the Board of Directors in 1990. Prior to joining the Company, Mr. Stogner served
as Vice President -- Administration and Control for Chicago Pacific Corp. from
1986 to 1989 and as Vice President -- Finance of Pennsylvania House (a division
of General Mills, Inc.) from 1972 to 1986. Mr. Stogner holds a degree in
business administration and accounting from King's College.
Conor Stack joined the European Group of the Company in 1979 as Financial
Controller of Goblin Ireland, the Company's European manufacturing facility. In
1980, Mr. Stack was promoted to Managing Director, the position he currently
holds. Prior to joining the Company, Mr. Stack was Financial Controller for
Kerry Precision Ball Company from 1975 to 1980. Prior to that, Mr. Stack was an
audit manager with Griffin Lynch & Co., Chartered Accountants. Mr. Stack is a
Chartered Accountant and received a degree in business commerce from University
College in Cork, Ireland.
Larry Tempesco joined the Company in 1977 as Production Control Manager and
was promoted to Assistant Marketing Manager in 1984, Director of Marketing in
1990, Vice President of Marketing in 1994 and Vice President of Sales and
Marketing in 1996. Prior to joining the Company, Mr. Tempesco held a
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<PAGE> 57
variety of management positions with Brodart Industries. Mr. Tempesco holds a
degree from Bloomsburg University.
Michael R. Deschamps joined the Company in 1993 as Director of the Plastics
Division. He was promoted in 1995 to Vice President, Plastics Group and, in
1996, to Vice President, Manufacturing. Prior to joining the Company, Mr.
Deschamps held a variety of management positions including Manager of
Fabrication and Assembly Operations at Smith Corona Corporation from 1986 to
1993, and as Director of Product Development and Sales & Marketing at Ithaca Gun
Company. Mr. Deschamps holds a B.S. in mechanical engineering from Cornell
University.
Thomas Tuohy joined the Company in 1994 as Director of Operations and in
1995 was promoted to Vice President of Inventory Planning and Control. Prior to
joining the Company, Mr. Tuohy served in a variety of management and information
systems positions, including Director of Materials at Smith Corona Corporation
from 1969 to 1994. Mr. Tuohy holds a degree in business administration from
Syracuse University.
Roger D. Arrington joined the Company in 1989 as a Financial Analyst and
was promoted to Vice President of Corporate Analysis in 1990. Prior to joining
the Company, Mr. Arrington served in a variety of accounting functions for
Bethlehem Steel Corporation, rising to Controller of the Company's wire rope
division. Mr. Arrington holds a degree in business administration and accounting
from Virginia Polytechnic Institute.
Mark E. Baer joined the Company in 1988 as Director of Product Evaluation
and was promoted to Vice President of Electrical Engineering in 1990. Prior to
joining the Company, Mr. Baer served as Electrical Project Engineer with GS
Electric from 1982 to 1987, and as a Senior Product Engineer with Yale Material
Handling from 1987 to 1988. Mr. Baer has a B.S. in electrical engineering from
the Pennsylvania State University.
Joseph W. Crawford joined the Company in 1978 as Director of Credit and was
promoted to Vice President and Treasurer in 1990. Prior to joining the Company,
Mr. Crawford served as a Credit Analyst with Girard Trust Bank from 1965 to
1967, as a Credit Representative with American Mutual Insurance from 1967 to
1970, as an Assistant Credit Manager with Westinghouse Electric Supply from 1970
to 1972, and as a Credit Manager with KSM Fastening Systems (a division of
Omark) from 1972 to 1978. Mr. Crawford holds a degree in business administration
from Villanova University.
John Lilly joined the Company in 1993 as Corporate Vice President of
Information Services. Prior to joining the Company, Mr. Lilly served as Director
of Information Services with Hamilton Beach/Proctor Silex from 1990 to 1993 and
as a Management Consultant from 1988 to 1990. From 1970 to 1988, Mr. Lilly
served in a variety of information services positions with Blue Cross/Blue
Shield of Virginia, rising to the position of Director of Automated Services.
Mr. Lilly has a degree in data processing from Smith Deal College in Richmond,
Virginia.
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<PAGE> 58
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid for the fiscal
years ended December 31, 1993, 1994 and 1995 to each of the persons who are the
most highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)(2) COMPENSATION
- -------------------------------------------------- ---- ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Jonathan Miller................................... 1995 $ 343,637 $ 11,951 $ 11,517(3)
Chairman of the Board, Chief 1994 900,000 35,527 41,892
Executive Officer and President, 1993 1,180,208 22,002 39,878
North American Group
Matthew Miller.................................... 1995 $ 355,911 $ -- $ 7,396(3)
Vice Chairman of the Board 1994 878,019 -- 25,406
and President, European Group 1993 2,276,288 -- 22,184
W. Earl Stogner................................... 1995 $ 675,000 $ 9,313 $ 8,986(3)
Executive Vice President 1994 675,000 9,573 31,767
and Chief Financial Officer 1993 600,000 3,271 28,392
</TABLE>
- ---------------
(1) The above listed executives are participants in the Shop Vac Corporation
Pension Plan, a defined benefit pension plan. This plan provides an annual
benefit based upon the employee's average compensation for his or her
highest five consecutive years of compensation and the number of years'
service to the Company. The table below sets forth the estimated annual
benefit payable based on the indicated final average compensation and years
of service, assuming retirement at age 65:
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35
------------------------------------------- ------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$100,000................................... $ 15,625 $31,250 $46,875 $46,875 $46,875 $46,875 $46,875
125,000.................................... 20,000 40,000 60,000 60,000 60,000 60,000 60,000
150,000 and above.......................... 24,375 48,750 73,125 73,125 73,125 73,125 73,125
</TABLE>
(2) Comprised of amounts reimbursed to Jonathan Miller and W. Earl Stogner in
connection with taxes paid by them with respect to the value of the personal
use portion of Company-provided vehicles.
(3) Comprised of (i) in the case of Jonathan Miller, employer matching
contributions totaling $10,125 in 1995 to the Shop Vac Executive Benefit
Trust through March 31, 1995 and a $1,392 term life insurance premium, (ii)
in the case of Matthew Miller, employer matching contributions totalling
$6,004 in 1995 to the Shop Vac Executive Benefit Trust through March 31,
1995 and a $1,392 term life insurance premium and (iii) in the case of W.
Earl Stogner, employer matching contributions totalling $7,594 in 1995 to
the Shop Vac Executive Benefit Trust through March 31, 1995 and to the Shop
Vac Employee Savings Plan thereafter for the remainder of 1995 and a $1,392
term life insurance premium.
OTHER ARRANGEMENTS
Pursuant to employment agreements between the Company and each of Jonathan
Miller and Matthew Miller, the Company has agreed pay to each of them (i) a base
salary at the rate of $350,000 per annum and (ii) commencing in calendar year
1997 and for each successive calendar year thereafter, incentive compensation of
$400,000 for any calendar year if with respect to such year, the Company
generates actual earnings before interest and taxes ("EBIT") that equal or
exceed 90% of the Company's budgeted EBIT for such year or amounts of less than
$400,000 for a given calendar year if the Company achieves certain lower EBIT
threshholds for such year. In addition to the foregoing, the Company may
increase such base salaries, based on merit review, taking into account
performance, the employee's responsibilities and increased cost of living,
and/or pay additional discretionary bonus compensation, at the discretion of the
Company's independent directors. In exchange for such compensation, (i) Jonathan
Miller has agreed to serve as Chairman of the
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Company's Board of Directors, President of the Company's North American Group
and Chief Executive Officer of the Company for a three year evergreen term, and
(ii) Matthew Miller has agreed to serve as Vice Chairman of the Company's Board
of Directors and President of the Company's European Group for a three-year
evergreen term. Under the terms of the agreement, if either Jonathan or Matthew
Miller is terminated without cause or resigns with good reason, he is entitled
to receive continued insurance coverage for the following three years and (at
his option) either (i) the greater of (a) continued salary for the next three
years, plus bonuses in each such year equal to the bonus paid to him in the year
immediately prior to the year in which his employment was terminated or (b)
$750,000 or (ii) a lump-sum payment equal to the present value of the payments
described in clause (i). Each of Jonathan Miller and Matthew Miller is also
entitled to receive such severance if his employment is terminated as a
consequence of a change of control of the Company; however, if such termination
occurs in connection with or as a consequence of a change of control occurring
upon or following the exercise by the Holders of the Notes of their rights to
the Millers' stock as a result of a default under the Indenture and the
subsequent foreclosure on the collateral, each of Jonathan Miller and Matthew
Miller have agreed that any and all payments due to them pursuant to their
respective employment agreements with respect to such termination will be
subordinated to the full payment of all sums due to the Holders of the Notes
thereunder.
Pursuant to the terms of an employment agreement between the Company and W.
Earl Stogner, the Company has agreed to pay to Mr. Stogner a base salary at the
rate of $675,000 per annum, plus a discretionary bonus determined by the
Company's Board of Directors in its sole discretion. In exchange for such
compensation, Mr. Stogner has agreed to serve as a Director, Executive Vice
President and Chief Financial Officer of the Company for a three-year evergreen
term. Under the terms of the agreement, if Mr. Stogner is terminated without
cause or resigns with good reason, he is entitled to receive continued insurance
coverage for the following three years and (at his option) either (i) continued
salary for the next three years, plus bonuses in each such year equal to the
bonus paid to him in the year immediately prior to the year in which his
employment was terminated or (ii) a lump-sum payment equal to the present value
of the payments described in clause (i). Mr. Stogner is also entitled to receive
such severance upon a change of control of the Company.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently leases a sales/administration/distribution facility
in Normanton, England from New Yorkshire Limited, a company controlled by
Jonathan and Matthew Miller. Annual rent under this lease for 1996 is $340,000
and for 1997 is $360,000 and is comparable to annual rent paid for similar
facilities in arms-length transactions in the local market. The Company has also
guaranteed up to UKL 500,000 (approximately $800,000) of indebtedness incurred
by New Yorkshire Limited from Midland Bank plc ("Midland") in connection with
the acquisition of the Normanton facility.
The Company and its stockholders have entered into a stockholders agreement
which provides, in part, (i) for the accrual and payment of an annual dividend
equal to 10% of the net income of the Company (after taxes) which accrues and is
payable commencing upon the death, disability or incapacity of Jonathan Miller
or Matthew Miller, (ii) effective joint control of the Company by Jonathan
Miller and Matthew Miller and (iii) restrictions on the transfer of any of the
Company's stock. The dividend provision set forth in the stockholders agreement
suspends the payment of such dividends to the extent such payment would result
in the breach or violation of the terms, conditions or covenants of the
Company's financing arrangements, including the Notes. The Company and its
stockholders have agreed in writing to permit the stockholders to pledge their
respective shares of the Company's stock in connection with the Private Offering
and the Exchange Offer, notwithstanding the provisions of the stockholders
agreement.
The Company has entered into written employment agreements with each of
Jonathan Miller, Matthew Miller and W. Earl Stogner. See "Management -- Other
Arrangements."
All future transactions entered into by the Company with related parties
will be on terms no less favorable than those available from unaffiliated
parties. This is also a requirement in the Indenture. There are no proposed
dealings between the Company and related parties other than as disclosed.
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PRINCIPAL STOCKHOLDERS
All of the voting common stock of the Company is beneficially owned equally
by Jonathan Miller and Matthew Miller. Jonathan Miller beneficially owns 50%
(3,250) of the issued and outstanding shares of the Company's voting stock
through (a) his direct ownership of 2,053 shares and (b) his controlling
ownership of a corporate general partner of a family limited partnership
("FLP"), which owns 1,197 shares. Matthew Miller beneficially owns 50% (3,250)
of the issued and outstanding shares of the Company's voting stock (a) through
his direct ownership of 2,053 shares, (b) as a controlling general partner of a
separate FLP, which owns 989.5 shares and (c) as trustee of a trust (the
"Trust") for the benefit of his children, which owns 207.5 shares. In the past
ten years, the Company has paid no dividends and has made no other distribution
to its stockholders with respect to its stock. In connection with the Private
Offering, Jonathan Miller and Matthew Miller pledged all of the outstanding
capital stock of the Company held directly by them, and caused the FLPs and the
Trust to pledge all of the outstanding capital stock of the Company owned by
such entities, to secure payment of the Company's obligations under the Notes.
The address of both Jonathan Miller and Matthew Miller is c/o the Company, 2323
Reach Road, Williamsport, Pennsylvania 17701.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW REVOLVING CREDIT FACILITY
On October 1, 1996, the Company and Felchar (together, the "Borrowers")
entered into a Credit Agreement with First Union National Bank of North
Carolina, as agent for the lenders and a lender (the "Lender"), to provide the
New Revolving Credit Facility.
The New Revolving Credit Facility has an initial term of three years and
provides for an aggregate commitment of up to $25 million, subject to a
borrowing base limitation (the "Borrowing Base") based on the aggregate of
certain percentages of the eligible accounts receivable and eligible inventory
of the Company and its domestic subsidiaries. With respect to the Borrowing
Base, as of October 31, 1996, the Company was able to borrow up to approximately
$23.0 million in the aggregate. The New Revolving Credit Facility includes (as
part of and not in addition to the $25 million New Revolving Credit Facility) a
sub-facility for the issuance of up to an aggregate of $10 million in stand-by
and trade letters of credit to support the Company's operations.
Amounts outstanding under the New Revolving Credit Facility will bear
interest at either (i) 0.75% plus the higher of (a) the federal funds rate plus
0.50% per annum and (b) the Lender's prime commercial lending rate or (ii) LIBOR
plus 2.00%, determined at the Company's option. Amounts outstanding under the
New Revolving Credit Facility are secured by a first priority lien on the
accounts receivable and inventories of the Borrowers, and the Company's
obligations under the New Revolving Credit Facility is guaranteed by Felchar,
which guarantee is secured by a pledge of Felchar's accounts receivable and
inventories.
The New Revolving Credit Facility contains covenants and provisions that
restricts, among other things, the Company's ability to: (i) merge or
consolidate with another entity; (ii) incur additional indebtedness, including
guarantees; (iii) incur liens on its property; (iv) engage in certain asset
sales or other dispositions or sale-leaseback transactions; (v) lend money; (vi)
engage in joint ventures, acquisitions and other investments; (vii) create new
subsidiaries; (viii) pay dividends, repurchase stock or make other restricted
payments; (ix) engage in transactions with affiliates; (x) make certain changes
in the Company's lines of business and (xi) enter into any negative pledges or
other burdensome contractual covenants. The New Revolving Credit Facility
requires the satisfaction of certain financial performance criteria (including a
specified maximum annual operating lease expense of $3.0 million; specified
limitations on annual capital expenditures (including capital lease obligations)
of $3.5 million for each of 1997 and 1998 and $4.0 million annually thereafter;
a leverage ratio of funded debt to EBITDA of 4.85:1 through September 30, 1997,
4.25:1 thereafter through September 30, 1998 and 3.50:1 thereafter and an
interest coverage ratio of EBITDA to Interest Expense (as defined in the New
Revolving Credit Facility) of 1.80:1 through September 30, 1997, 2.00:1
thereafter through September 30, 1998, 2.25:1 thereafter through September 30,
1999 and 2.50:1 thereafter). In addition, if any Subsidiary of either of the
Borrowers issues or sells equity securities or subordinated debt, the New
Revolving Credit Facility requires the Borrowers to make a mandatory principal
payment in an amount equal to 100% of the net proceeds of such sale or issuance
by such Subsidiary.
Events of default under the New Revolving Credit Facility includes, among
other things: (i) any failure of the Company to pay principal, interest or fees
thereunder when due; (ii) payment default or other default under other
Indebtedness; (iii) noncompliance with or breach of certain covenants contained
in the New Revolving Credit Facility and certain related documents; (iv)
material inaccuracy of any representation or warranty when made by the Company
in the New Revolving Credit Facility and certain related documents; (v) certain
events of bankruptcy or insolvency; (vi) imposition of judgment or ERISA liens;
(vii) invalidity of obligations created by the New Revolving Credit Facility and
related documents; (viii) a Change of Control (as defined in the New Revolving
Credit Facility); and (ix) a Material Adverse Change (as defined in the New
Revolving Credit Facility).
FOREIGN DEBT OBLIGATIONS
Societe Generale S.A. has extended a line of credit to Shop Vac France, a
division of the Company, and Goblin France S.A., the Company's French
subsidiary, which provides (i) an overdraft facility of FF 5.7 million
(approximately $1.1 million) and a receivables financing of FF 24.0 million
(approximately $4.6
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million) for Shop Vac France and (ii) an overdraft facility of FF 4.8 million
(approximately $900,000) for Goblin France S.A. At September 30, 1996, the
aggregate outstanding borrowings under the overdraft facilities totalled FF 9.6
million (approximately $1.9 million) and under the receivables financing
facility totalled FF 21.5 million (approximately $4.2 million).
Goblin (UK) Limited, the Company's subsidiary in the United Kingdom
("Goblin UK"), has obtained credit facilities (the "Midland Facilities") for an
amount in the aggregate of up to UKL 2.35 million (approximately $3.7 million)
from Midland pursuant to a letter agreement accepted by Goblin UK as of March 1,
1995 and extended subsequently by a letter agreement dated March 21, 1996
through March 1997. The Midland Facilities are comprised of a sterling
overdraft, a mixed currency overdraft, engagement facilities and documentary or
other credits or acceptances, as well as up to UKL 350,000 (approximately
$500,000) for duty deferment bonds. The Midland Facilities bear interest at
Midland's base rate plus between 1.0% and 2.0%, depending upon the outstanding
balance of the Midland Facilities. In addition, the Midland Facilities are
secured by (i) a first priority fixed charge over all present and future bank
and other debts of Goblin UK and (ii) a first priority floating charge over all
present and future assets, goodwill, undertakings and uncalled capital of Goblin
UK. The Company has guaranteed the Midland Facilities on behalf of Goblin UK. At
September 30, 1996, there were no outstanding borrowings under the Midland
Facilities.
The Company has guaranteed indebtedness of its subsidiary, McCulloch
Espana, with respect to credit facilities extended by four Spanish banks with an
aggregate borrowing availability of approximately $1.9 million. At September 30,
1996, the aggregate outstanding borrowings under these facilities totalled
approximately $700,000 and consisted of $600,000 of overdraft facility
borrowings and $100,000 of accounts receivable financing.
Under various agreements between Goblin Ireland Limited, the Company's
Irish subsidiary ("Goblin Ireland"), and each of Shannon Free Airport
Development Company Limited ("SFADC") and the Industrial Development Authority
in Ireland (the "IDA"), Goblin Ireland has received, upon satisfaction of
certain conditions, grants from SFADC and/or the IDA of approximately 45% of the
acquisition cost of certain capital assets. In accordance with the grant
agreements, Goblin Ireland is required to maintain aggregate retained earnings
in the amount of $5.3 million. Either of the IDA or SFADC, as the case may be,
may revoke its grants and require repayment of its grants previously made if
Goblin Ireland breaches any of the various grant agreements with it. If, among
other things, Goblin Ireland changes the nature of its operations, ceases to
operate, fails to satisfy its obligations or becomes bankrupt, the various grant
agreements with both SFADC and the IDA would be breached. Goblin Ireland
believes it is in full compliance with the provisions of the various grant
agreements. Goblin Ireland's contingent liability for the repayment of grants
received under the various grant agreements terminates 10 years from receipt of
the grant amounts and amounted to $3.7 million at December 31, 1995.
OLD REVOLVING CREDIT FACILITY
On May 15, 1990, the Company and Felchar entered into the Old Revolving
Credit Facility with the Lender. The Old Revolving Credit Facility contained
certain financial and operating covenants which restricted the Company's ability
to incur additional indebtedness, make investments or create or permit certain
liens. In addition, the Old Revolving Credit Facility was secured by pledges of
(i) the Millers' Stock, (ii) substantially all of the Company's assets, (iii)
all issued and outstanding shares of the capital stock of the Company's domestic
subsidiaries and (iv) 65% of the equity interests in each of the Company's
direct and indirect foreign subsidiaries. The Company was also required to
maintain certain financial ratios.
On February 1, 1994, the Company and Felchar amended the Old Revolving
Credit Facility to provide for a revolving line of credit of up to $55 million
that was scheduled to expire in 1999.
On May 25, 1995, the Old Revolving Credit Facility was amended to provide
for an additional $20 million of borrowing capacity, which was due on April 30,
1996 and has been repaid. The amendment agreement imposed additional financial
and operating covenants, including a requirement that the Company meet minimum
earnings levels and ratios related to debt, interest expense and accounts
payable. The
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amendment also required a repayment of at least $60 million of outstanding
principal in the event of either the sale of McCulloch or the issuance of equity
securities by the Company.
On November 1, 1995, with the $30 million net proceeds received in
connection with the sale of McCulloch, the Company repaid the remaining $3.4
million outstanding under the additional $20 million loan obtained pursuant to
the May 25, 1995 amendment agreement, repaid the remaining $8.0 million
outstanding balance of term loans with the Lender, as well as a portion of the
outstanding aggregate principal of the Old Senior Notes and the Old Revolving
Credit Facility. Prior to the Company's repayment of the Old Revolving Credit
Facility and the Old Senior Notes with a portion of the proceeds from the
Private Offering, it had been in breach of various financial covenants of the
Old Revolving Credit Facility. In addition, in April 1996, the Company failed to
make a required $6.7 million principal payment to the Holders of the Old Senior
Notes, and that payment default by the Company caused a cross-default of the Old
Revolving Credit Facility. On August 28, 1996, the Old Revolving Credit Facility
was amended to provide to the Company and Felchar a $7.5 million temporary
priority facility maturing on October 31, 1996. The proceeds of the priority
facility were available to be used (i) to make a $770,389 principal payment with
respect to the Old Senior Notes, (ii) to pay $307,621 in amendment fees to the
Holders of the Old Senior Notes in connection with an Amendment Agreement
between the Company and such Noteholders, (iii) to make a $112,500 facility fee
payment to the Lender upon closing the priority facility and (iv) for working
capital and general corporate purposes. The priority facility was fully secured
by a first priority lien on all the collateral securing the Old Revolving Credit
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Risk
Factors -- Substantial Leverage; Recent Defaults."
Pursuant to the Amendment Agreement with the Lender, the Lender temporarily
waived all existing defaults and the parties temporarily suspended the relevant
financial covenants and principal payment dates with respect to payments due or
past due under the Old Revolving Credit Facility. The Old Revolving Credit
Facility was repaid in full with a portion of the proceeds of the Private
Offering. The Company is in full compliance with the terms of all of its
financings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
OLD SENIOR NOTES
The Old Senior Notes, which had an aggregate outstanding principal amount
of approximately $30.0 million bearing interest at 10.83%, required (i) monthly
interest payments and (ii) annual principal payments of $6.7 million commencing
April 1996 through April 30, 2001. The Old Senior Notes were senior secured
indebtedness of the Company and contained certain financial and operating
covenants which, among other things, restricted the Company's ability to incur
indebtedness, make investments or create or permit certain liens. The Company
used a portion of the proceeds of the Private Offering to repay the Old Senior
Notes; including the prepayment penalty of approximately $2.5 million.
On May 25, 1995, the Holders of the Old Senior Notes agreed to permit the
Company to incur an additional $20 million of senior secured debt in the form of
a term loan from the Lender, and the Lender obtained a superpriority lien
against the Company's assets. However, in exchange for such accommodation, the
Company agreed to reduce its outstanding aggregate debt by $60 million not later
than December 31, 1995. Although the McCulloch disposition generated $30 million
in net cash proceeds, all of which were applied to reduce debt in order of
seniority and priority, the Company had been in breach, prior to the Company's
repayment of the Old Senior Notes and the Old Revolving Credit Facility with a
portion of the proceeds from the Private Offering, of numerous financial
covenants. In addition, in April 1996, the Company failed to make a $6.7 million
required principal payment to the holders of Old Senior Notes. See "Risk
Factors -- Substantial Leverage; Recent Defaults" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
On August 28, 1996, contemporaneously with making a $770,389 principal
payment to the Holders of the Old Senior Notes, the Company entered into an
Amendment Agreement with the Holders of the Old Senior Notes pursuant to which
such Holders temporarily waived all existing defaults under the Old Senior Notes
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and temporarily suspended the relevant financial covenants and principal payment
dates with respect to payments due or past due under the Old Senior Notes. The
Old Senior Notes were paid in full with a portion of the proceeds of the Private
Offering. The Company is in full compliance with the terms of all of its
financings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CAPITALIZED LEASES
The Company and its subsidiaries have obligations under various capitalized
leases which expire within the next eight years for real estate and equipment
with a net book value of $10 million as of December 31, 1995.
SETTLEMENT LIABILITIES
In connection with the final settlement of certain patent litigation
between The Toro Company ("Toro"), on the one hand, and the Company and
McCulloch, on the other hand, the Company agreed to pay Toro the sum total of
$2.0 million as follows: (i) $500,000 on or before December 1, 1995, (ii)
$250,000 on or before February 15, 1996 and (iii) $1,250,000 in 36 equal monthly
installments of $34,722, commencing March 1, 1996. At September 30, 1996, the
Company had an outstanding balance of approximately $1.0 million owing to Toro.
OTHER INDEBTEDNESS
The remainder of the Company's indebtedness consists of certain
indebtedness of its international subsidiaries and totalled approximately $2.6
million as of September 30, 1996.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to an Indenture (the
"Indenture") between the Company and Marine Midland Bank, as trustee (the
"Trustee"). The Exchange Notes will evidence the same indebtedness as the
Private Notes (which they replace) and will be entitled to the benefits of the
Indenture. The form and terms of the Exchange Notes are the same as the form and
terms of the Private Notes except that (i) the Exchange Notes will have been
registered under the Securities Act, and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) Holders of the Exchange
Notes will not be entitled to certain rights of Holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"), as in effect on the date of
the Indenture. The terms of the security arrangements with respect to the Notes
are set forth in the Pledge Agreement (as defined), which was entered into
simultaneously with the Indenture. The Notes are subject to all such terms, and
Holders of Notes are referred to the Indenture, the Pledge Agreement and the
Trust Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture and the Pledge Agreement does not purport to be
complete and is qualified in its entirety by reference to the Indenture and the
Pledge Agreement, including the definitions therein of certain terms used below.
A copy of the Indenture, the Pledge Agreement and Registration Rights Agreement
is available as set forth under "-- Additional Information." The definitions of
certain terms used in the following summary are set forth below under
"-- Certain Definitions."
The Notes will rank senior in right of payment to all subordinated
Indebtedness of the Company. The Notes will rank pari passu in right of payment
with all senior borrowings, including borrowings under the New Revolving Credit
Facility. The Notes are secured by a first priority pledge of the Millers'
Stock. The New Revolving Credit Facility is secured by a pledge of the
inventories and accounts receivable of the Company and Felchar Manufacturing
Corporation, a domestic Subsidiary of the Company that manufactures motors
("Felchar").
A portion of the operations of the Company are conducted through Felchar
and the Company's foreign Subsidiaries and, therefore, the Company is dependent
to a certain extent upon the cash flow of its Subsidiaries to meet its
obligations, including its obligations under the Notes. The Private Notes are,
and the Exchange Notes will be, structurally subordinated to all indebtedness
and other liabilities and commitments (including trade payables and lease
obligations) of the Company's Subsidiaries. Any right of the Company to receive
assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) will be structurally subordinated to the claims of
that Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company. At September 30, 1996, on a pro forma basis after giving effect to the
Private Offering and the application of the net proceeds therefrom, the
aggregate principal amount of senior Indebtedness of the Company and its
subsidiaries would have been approximately $113.6 million, $100.0 million of
which would have been represented by the Notes. In addition, the Notes would
have been structurally subordinated to approximately $6.4 million of
Indebtedness and $38.7 million of other liabilities (including trade payables)
of the Company's subsidiaries. See "Risk Factors -- Effective Ranking."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $100.0 million
and will mature on September 1, 2003. Interest on the Notes will accrue at the
rate of 10 5/8% per annum and will be payable semi-annually in arrears on March
1 and September 1, commencing on March 1, 1997, to Holders of record on the
immediately preceding February 15 and August 15. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if
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any, interest and Liquidated Damages, if any, on the Notes will be payable at
the office or agency of the Company maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments with respect to Notes having a principal
amount of $1.0 million or more the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Trustee maintained for such purpose. The Notes
will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to September
1, 2000. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on September 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------------------ ----------
<S> <C>
2000.............................................................. 105.313%
2001.............................................................. 102.656%
2002 and thereafter............................................... 100.000%
</TABLE>
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate; provided that
no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
SECURITY
The Principals and certain family partnerships and trusts that together own
100% of the Millers' Stock have entered into a pledge agreement (the "Pledge
Agreement") which provides for the first priority pledge by each such pledgor to
Marine Midland Bank, as collateral agent (the "Collateral Agent"), of all of the
Millers' Stock. Such pledge secures the payment and performance when due of all
of the Obligations of the Company under the Indenture and the Notes as provided
in the Pledge Agreement. The pledges under the Pledge Agreement are non-recourse
to any of the other assets or income of the pledgors thereunder.
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Indenture and the Pledge
Agreement, the pledgors will be entitled to receive all cash dividends, interest
and other payments made upon or with respect to the collateral (the
"Collateral") pledged by them and to exercise any voting and other consensual
rights pertaining to the Collateral pledged by them. Upon the occurrence and
during the continuance of an Event of Default, (i) all rights of the pledgors to
exercise such voting or other consensual rights shall cease, and all such rights
shall become vested in the
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Collateral Agent, which, to the extent permitted by law, shall have the sole
right to exercise such voting and other consensual rights, (ii) all rights of
the pledgors to receive all cash dividends, interest and other payments made
upon or with respect to the pledged Collateral will cease and such cash
dividends, interest and other payments will be paid to the Collateral Agent and
(iii) the Collateral Agent may sell the pledged Collateral or any part thereof
in accordance with the terms of the Pledge Agreement. All funds distributed
under the Pledge Agreement and received by the Collateral Agent for the benefit
of the Holders of the Notes will be distributed by the Collateral Agent pro rata
to the Holders of Notes in accordance with the provisions of the Indenture and
the Pledge Agreement.
Under the terms of the Pledge Agreement, the Collateral Agent will
determine the circumstances and manner in which the pledged Collateral shall be
disposed of, including, but not limited to, the determination of whether to
release all or any portion of the pledged Collateral from the Liens created by
the Pledge Agreement and whether to foreclose on the pledged Collateral
following an Event of Default. Moreover, upon the full and final payment and
performance of all Obligations of the Company under the Indenture and the Notes,
the Pledge Agreement shall terminate and the pledged Collateral shall be
released.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control. Upon the occurrence of a Change of Control, each Holder
of Notes will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of purchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of Control.
On a date that is at least 30 but no more than 60 days from the date on
which the Company mails notice of the Change of Control (the "Change of Control
Payment Date"), the Company will, to the extent lawful, (i) accept for payment
all Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent an amount equal to the Change
of Control Payment in respect of all Notes or portions thereof so tendered and
(iii) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal amount of
Notes or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each Holder of Notes so tendered the Change of Control Payment
for such Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each Holder a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered, if any; provided
that each such new Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer on the
terms, in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
The Change of Control provisions described above shall be applicable
whether or not any other provisions of the Indenture are applicable.
The New Revolving Credit Facility contains prohibitions of certain events
that would constitute a Change of Control. In addition, the exercise by the
Holders of Notes of their right to require the Company to repurchase the Notes
or of their rights under the Pledge Agreement could cause a default under the
New
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Revolving Credit Facility. The Company's ability to pay cash to the Holders of
Notes upon a repurchase may be limited by the Company's then existing financial
resources.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or any Related Party (as defined below) thereof,
(ii) the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation, but excluding any foreclosure on, or
sale of Collateral by, the Collateral Agent pursuant to the Pledge Agreement)
the result of which is that any "person" (as defined above), other than the
Principals or any Related Party, becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of (a) more than 35% of the voting stock of the Company and (b) more
of the voting stock of the Company than is at the time "beneficially owned" (as
defined above) by the Principals and their Related Parties in the aggregate or
(iv) the first day on which a majority of the members of the Board of Directors
of the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Principals" means Jonathan Miller and Matthew Miller.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or the estate of such
Principal during any period in which such estate holds Equity Interests for the
benefit of such Principal's spouse or child or (ii) a trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding an 80% or more controlling interest of which
consist of such Principal and/or such other Persons referred to in the
immediately preceding clause (i).
Asset Sales. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, engage in an Asset Sale unless (i) the
Company (or the Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Subsidiary is in the form of cash; provided that
the amount of (x) any liabilities (as shown on the Company's or such
Subsidiary's most recent balance sheet), of the Company or any Subsidiary (other
than contingent liabilities and liabilities that are by their terms subordinated
to the Notes or any guarantee thereof) that are cancelled or assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases the Company or such Subsidiary from further liability and (y) any notes
or other obligations received by the Company or any such Subsidiary from such
transferee that are immediately converted by the Company or such Subsidiary into
cash (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds (i) to permanently reduce borrowings
under one or more Credit Facilities (and to correspondingly reduce commitments
with respect thereto), or (ii) to the acquisition of a controlling interest in
another business, the making of a capital expenditure or the acquisition of
other long-term assets, in each case, in the same line of business as the
Company was engaged in on the date of the Indenture. Pending the final
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application of any such Net Proceeds, the Company may temporarily reduce the
Credit Facilities or otherwise invest such Net Proceeds in any manner that is
not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of purchase, in accordance with the procedures set forth in the Indenture. To
the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that only Notes
with denominations of $1,000 or integral multiples thereof, shall be purchased).
Upon completion of such offer to purchase, the amount of Excess Proceeds shall
be reset at zero.
CERTAIN COVENANTS
Restricted Payments. The Indenture provides that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly: (i) declare
or pay any dividend or make any other payment or distribution on account of the
Company's Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's Equity Interests in their capacity
as such (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of the Company); (ii) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the Company or any
Affiliate of the Company (other than any such Equity Interests owned by the
Company or any Wholly Owned Subsidiary of the Company); (iii) make any principal
payment on, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Notes; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the "-- Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture (excluding Restricted Payments permitted by clauses (ii)
and (iii) of the next succeeding paragraph), is less than the sum of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale since the date of the Indenture of Equity Interests of
the Company or of Disqualified Stock or debt securities of the Company that
have been converted into such Equity Interests (other than Equity Interests
(or Disqualified Stock or convertible debt securities) sold to a Subsidiary
of the Company and other than Disqualified Stock or debt securities that
have been converted into Disqualified Stock), plus (iii) to the extent that
any Restricted Investment that was made after the date of the Indenture is
sold for cash or otherwise liquidated or repaid for cash, the lesser of (A)
the cash return of
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capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (iv) $500,000.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any Indebtedness that is subordinated to
the Notes in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from clause (c)
(ii) of the preceding paragraph; and (iii) the defeasance, redemption or
repurchase of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness or the substantially concurrent
sale (other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c) (ii) of the
preceding paragraph.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, which calculations may be
based upon the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock. The Indenture
provides that the Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guaranty or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) and that the
Company will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company may incur Indebtedness (including Acquired Debt) if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred would have been at least
(i) 2.0 to 1.0 in the case of Indebtedness incurred prior to September 1, 1998
and (ii) 2.25 to 1.0 in the case of Indebtedness incurred thereafter, in each
case determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had been incurred at
the beginning of such four-quarter period.
The foregoing provisions will not apply to:
(i) the incurrence by the Company and Felchar of Indebtedness and
letters of credit pursuant to one or more Credit Facilities (with letters
of credit being deemed to have a principal amount equal to the maximum
potential liability of the Company thereunder) in an aggregate principal
amount not to exceed $25 million at any time outstanding, less any amounts
applied to permanently reduce borrowings under Credit Facilities pursuant
to the provisions described under "Asset Sales" above;
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes;
(iv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Subsidiary, in an aggregate principal amount not to exceed
$5.0 million at any time outstanding;
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(v) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
(vi) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries; provided, however, that (i) if the Company is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinate to the payment in full of all Obligations with respect to the
Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than the
Company or a Wholly Owned Subsidiary and (B) any sale or other transfer of
any such Indebtedness to a Person that is not either the Company or a
Wholly Owned Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Subsidiary, as the
case may be;
(vii) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any Indebtedness that is permitted by
the terms of the Indenture to be outstanding or currency exchange rate
risk; and
(viii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding not to exceed $10.0 million.
Liens. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien securing Indebtedness on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries. The
Indenture provides that the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to (i)(A) pay dividends or make any other distributions to the
Company or any of its Subsidiaries (1) on its Capital Stock or (2) with respect
to any other interest or participation in, or measured by, its profits, or (B)
pay any indebtedness owed to the Company or any of its Subsidiaries, (ii) make
loans or advances to the Company or any of its Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (A)
Existing Indebtedness and the New Revolving Credit Facility as in effect on the
date of the Indenture, (B) applicable law, (C) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (D) by reason of restrictions imposed by Permitted Liens on the
transfer of the assets that are subject to such Liens, (E) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (F) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired or (G) Permitted Refinancing Debt, provided that the restrictions
contained in the agreements governing such Permitted Refinancing Debt are no
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced.
Merger, Consolidation, or Sale of Assets. The Indenture provides that the
Company may not consolidate or merge with or into (whether or not the Company is
the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
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other than the Company) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Company under the Notes and the Indenture pursuant to
a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant.
Transactions with Affiliates. The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries to, make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that would have been obtained
in a comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (A) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $500,000, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the Independent Directors and (B) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $2.5 million, an opinion as to
the fairness to the Holders of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment banking firm of
national standing; provided that (x) any employment agreement in existence on
the date of the Indenture and any similar agreement entered into by the Company
or any of its Subsidiaries involving consideration that is not materially
greater than that under any such existing employment agreement, (y) transactions
between or among the Company and/or its Subsidiaries and (z) Restricted Payments
and Permitted Investments that are permitted by the provisions of the Indenture
described above under the caption "-- Restricted Payments", in each case, shall
not be deemed to be Affiliate Transactions.
Sale and Leaseback Transactions. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to, enter into any sale
and leaseback transaction; provided that the Company may enter into a sale and
leaseback transaction if (i) the Company could have (A) incurred Indebtedness in
an amount equal to the Attributable Debt relating to such sale and leaseback
transaction pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "-- Incurrence
of Additional Indebtedness and Issuance of Preferred Stock" and (B) incurred a
Lien to secure such Indebtedness pursuant to the covenant described above under
the caption "-- Liens," (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such sale and
leaseback transaction and (iii) the transfer of assets in such sale and
leaseback transaction is permitted by, and the Company applies the proceeds of
such transaction in compliance with, the covenant described above under the
caption "-- Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Subsidiaries. The Indenture provides that the Company (i) will not, and will
not permit any Wholly Owned Subsidiary of the Company to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned
Subsidiary of the Company to any Person (other than the Company or a Wholly
Owned Subsidiary of the Company), unless (A) such transfer, conveyance, sale,
lease or other disposition is of all the Capital Stock of such Wholly Owned
Subsidiary and (B) the cash Net Proceeds from such transfer, conveyance, sale,
lease or other
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disposition are applied in accordance with the covenant described above under
the caption "-- Asset Sales," and (ii) will not permit any Wholly Owned
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Subsidiary of
the Company.
Limitations on Issuances of Guarantees of Indebtedness. The Indenture
provides that the Company will not permit any Subsidiary, directly or
indirectly, to Guarantee or pledge any assets to secure the payment of any other
Indebtedness of the Company (other than Guarantees by any domestic operating
subsidiary with respect to Indebtedness incurred pursuant to the New Revolving
Credit Facility) unless such Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for the Guarantee of the
payment of the Notes by such Subsidiary, which Guarantee shall be senior to or
pari passu with such Subsidiary's Guarantee of or pledge to secure such other
Indebtedness. Notwithstanding the foregoing, any such Guarantee by a Subsidiary
of the Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon either (i) the release or discharge
of such Guarantee of such Indebtedness, except a discharge by or as a result of
payment under such Guarantee, or (ii) any sale, exchange or transfer, to any
Person not an Affiliate of the Company, of all of the Company's stock in, or all
or substantially all the assets of, such Subsidiary, which sale, exchange or
transfer is made in compliance with the applicable provisions of the Indenture.
The form of such Guarantee will be attached as an exhibit to the Indenture.
Business Activities. The Company will not, and will not permit any
Subsidiary to, engage in any business other than a Permitted Business, except to
such an extent as would not be material to the Company and its Subsidiaries
taken as a whole.
Independent Directors. From and after 180 days after the Closing Date, so
long as any of the Notes are outstanding, the Company shall have at least two
members of its Board of Directors who are neither officers nor employees of the
Company or any of its Affiliates or immediate family members thereof (the
"Independent Directors"). Any transaction requiring the approval of the majority
of the Independent Directors shall be prohibited at any time that there are not
at least two Independent Directors on the Company's Board of Directors. If the
Company fails to comply with the first sentence of this covenant, the Company
will pay Liquidated Damages to each Holder of Notes in an amount equal to $.50
per week per $1,000 in aggregate principal amount of Notes held by such Holder
until such Independent Directors take office; provided that, if at any time
after the first Independent Directors are appointed to the Board of Directors,
the Company shall fail to have at least two Independent Directors on its Board
of Directors, the Company shall have 90 days to cure such non-compliance before
Liquidated Damages will be assessed. In addition, on each day, after the first
anniversary of the date of the Indenture, that the Company fails to have two
Independent Directors on its Board of Directors for 180 days out of the
preceding 360-day period, the Company shall pay Liquidated Damages to each
Holder of Notes in an amount equal to $.50 per week per $1,000 in aggregate
principal amount of Notes held by such Holder. The Company shall not be required
to pay Liquidated Damages pursuant to this covenant in excess of $.50 per week
per $1,000 of Notes.
Payments for Consent. The Indenture provides that neither the Company nor
any of its Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any Notes for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports. The Indenture provides that, whether or not required by the rules
and regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the
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Commission on Form 8-K if the Company were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, following consummation of the Exchange Offer, the Company will file
a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, for so long as any Notes remain outstanding, the Company
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when due
of the principal of or premium, if any, on the Notes; (iii) failure by the
Company to comply with the provisions described under the captions "-- Change of
Control", "-- Asset Sales", "-- Restricted Payments" or "-- Incurrence of
Indebtedness and Issuance of Preferred Stock"; (iv) failure by the Company or
any pledgor for 30 days after notice from the Trustee or Holders of at least 25%
in aggregate principal amount of the then outstanding Notes to comply with any
of its other agreements, or to have cured any breach of any representation or
warranty, in the Indenture, the Notes or the Pledge Agreement; (v) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Subsidiaries (or the payment of which is guaranteed by
the Company or any of its Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, which default (A) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (B) results in
the acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $2.0
million or more; (vi) failure by the Company or any of its Subsidiaries to pay
final judgments aggregating in excess of $2.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (vii) repudiation by any
pledgor of its obligations under the Pledge Agreement, or the unenforceability
of the Pledge Agreement against any pledgor for any reason; and (viii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
September 1, 2000 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to September 1, 2000, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
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The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
There can be no assurance that in the event of an acceleration of Notes the
Company will be able to pay. See "Risk Factors -- Effective Ranking," and "--
Substantial Leverage; Recent Defaults."
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, STOCKHOLDERS AND
PLEDGORS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or the Pledge Agreement or for any claim based on, in
respect of, or by reason of, such obligations or their creation. The liability
of the pledgors under the Pledge Agreement will be limited to the Collateral.
Each Holder of Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default and
Remedies" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
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will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
123rd day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel to the effect that after the 123rd day following
the deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided below, the Indenture, the Notes or the Pledge Agreement
may be amended or supplemented with the consent of the Holders of at least a
majority in principal amount of the Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Notes), and any existing default or compliance with any
provision of the Indenture, the Notes or the Pledge Agreement may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, Liquidated Damages,
if any, or interest on the Notes (except a rescission of acceleration of the
Notes by the Holders of at least a majority in aggregate principal amount of the
Notes and a waiver of the payment default that resulted in such acceleration),
(v) make any Note payable in money other than that stated in the Notes, (vi)
make any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of Notes to receive payments of principal of
or premium, if any, Liquidated Damages, if any, or interest on the Notes, (vii)
waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), or (viii) make any change in the
foregoing amendment and waiver provisions.
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Without the consent of at least 66 2/3% in principal amount of the Notes
then outstanding (including consents obtained in connection with a purchase of,
or tender offer or exchange offer for, Notes), no waiver or amendment to the
Indenture may make any change in the provisions described above under the
caption "-- Change of Control" or "-- Security" that adversely affect the rights
of any Holder of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture, the Notes or
the Pledge Agreement, to cure any ambiguity, defect or inconsistency, to provide
for uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of Notes in
the case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of Notes or that does not adversely
affect the legal rights under the Indenture of any such Holder, or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company at 2323
Reach Road, P.O Box 3307, Williamsport, Pennsylvania 17701-0307, Attention: W.
Earl Stogner.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
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"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than sales of inventory in the ordinary course of business consistent with past
practices or in connection with the discontinuance of the McCulloch operations;
provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption " -- Change of Control" and/or the provisions described above under
the caption " -- Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant, and (ii) the issue or sale by the Company
or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the Company or
to another Wholly Owned Subsidiary, (ii) an issuance of Equity Interests by a
Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary and
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption " -- Restricted Payments" will not be deemed to be Asset
Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be reflected on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the New Revolving
Credit Facility or with any domestic commercial bank having capital and surplus
in excess of $500 million and a Keefe Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above and (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such
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Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
charges (excluding any such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and its
Subsidiaries for such period to the extent that such depreciation, amortization
and other non-cash charges were deducted in computing such Consolidated Net
Income, minus (v) non-cash items increasing consolidated revenues in determining
such Consolidated Net Income for such period, in each case, on a consolidated
basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the New Revolving Credit Facility) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables or inventory financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables or
inventory) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Revolving Credit Facility)
in existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest expense of such Person and its
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
one of its Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv)
the product of (a) all cash dividend payments (and non-cash dividend payments in
the case of a Person that is a Subsidiary) on any series of preferred stock of
such Person, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Subsidiary that executes a Subsidiary Guarantee and
its successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest or currency exchange rate swap agreements,
interest or currency exchange rate cap agreements
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and interest or currency exchange rate collar agreements and (ii) other
agreements or arrangements, in any case, designed to protect such Person against
fluctuations in interest or currency exchange rates and not entered into for
speculative purposes.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Millers' Stock" means all of the capital stock of the Company owned,
directly or indirectly, by Jonathan Miller, Matthew Miller and certain family
partnerships or trusts.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary gain (but not loss) or any gain (but not loss) realized
in connection with an Asset Sale, together with any related provision for taxes
on such gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Senior Term Debt or Senior Revolving Debt) secured by a Lien on the
asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the sale of wet/dry vacuums, floor-care or
cleaning products, or any similar products or any other business ancillary or
reasonably related thereto.
"Permitted Investments" means (i) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company that is evidenced by Capital Stock or
Subsidiary Intercompany Notes; (ii) any Investment in Cash Equivalents; (iii)
any Investment by the Company or any Subsidiary of the Company in a Person that
is evidenced by Capital Stock or Subsidiary Intercompany Notes, if as a result
of such Investment (A) such Person becomes a Wholly Owned Subsidiary of the
Company or (B) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Wholly Owned Subsidiary of the Company and that is
engaged in the same or a similar line of business as the Company and its
Subsidiaries were engaged in on the date of the Indenture; (iv) any Restricted
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales"; (v) any Investment acquired by the Company or any of
its Subsidiaries (A) in exchange for any other Investment or accounts receivable
held by the Company or any such Subsidiary in connection with or as a result of
a bankruptcy, workout, reorganization or recapitalization of the issuer of such
other Investment or accounts receivable or (B) as a result of a foreclosure by
the Company or any of its Subsidiaries with respect to any secured Investment or
other transfer of title with respect to any secured Investment in default; (vi)
Hedging Obligations; and (vii) additional Investments having an aggregate fair
market value, taken together with all other Investments made pursuant to this
clause (vii) that are at that time outstanding, not to exceed $0.5 million (with
the fair market value of each Investment being measured at the time made and
without giving effect to subsequent changes in value).
"Permitted Liens" means (i) Liens on the Collateral created by the
Collateral Documents, (ii) Liens on the Company's and Felchar's receivables and
inventory, and the proceeds from the disposition thereof, securing the
borrowings or letters of credit under Credit Facilities that were permitted by
the terms of the Indenture to be incurred; (iii) Liens in favor of the Company;
(iv) Liens on property of a Person existing at the time such Person is merged
into or consolidated with the Company or any Subsidiary of the Company; provided
that such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (v) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (vi) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vii) Liens to secure Indebtedness
(including Capital Lease Obligations) permitted by clause (iv) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness;
(viii) Liens existing on the date of the Indenture; (ix) Liens on the assets of
the Company's Subsidiaries securing Indebtedness of such Subsidiaries that was
permitted by the terms of the Indenture to be incurred; (x) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; and (xi) Liens incurred in the ordinary course of business
of the Company or any Subsidiary of the Company with respect to obligations that
do not exceed $1.0 million at any one time outstanding.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any
of its Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Indebtedness
of the Company or any of its Subsidiaries; provided that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing Debt
does not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith); (ii)
such Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and has a Weighted Average
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Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Notes on terms
at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (B)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means any Guarantee executed by a Subsidiary in
accordance with the provisions of the Indenture.
"Subsidiary Intercompany Notes" means the intercompany notes issued by
Subsidiaries of the Company in favor of the Company to evidence advances by the
Company, in each case, in the form attached as Exhibit E to the Indenture, which
notes shall not be junior to any other unsecured indebtedness of such
Subsidiary.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person, except that,
with respect to Goblin France, at least 95% of the outstanding Capital Stock or
other ownership interests thereof shall at the time be owned by such Person or
one or more Wholly Owned Subsidiaries of such Person.
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BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Exchange Notes will initially be issued in
the form of a global note (the "Global Note"). The Global Note will be deposited
on the Closing Date with, or on behalf of, the Depositary and registered in the
name of Cede & Co., as nominee of the Depositary.
Notwithstanding the foregoing, Notes (i) originally issued to or
transferred to institutional "accredited investors," as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act, who are not qualified
institutional buyers or to any other persons who are not qualified institutional
buyers or (ii) held by qualified institutional buyers who elect to take physical
delivery of their certificates instead of holding their interest through the
Global Note (and which are thus ineligible to trade through the Depositary)
(collectively referred to herein as "Non-Global Purchasers") will be issued, in
registered form, without interest coupons as "Certificated Notes." Upon the
transfer to a qualified institutional buyer of such Certificated Notes initially
issued to a Non-Global Purchaser, such Certificated Notes will, unless the
transferee requests otherwise or the Global Note has previously been exchanged
in whole for Certificated Securities, be exchanged for an interest in the Global
Note representing the principal amount of Exchange Notes being transferred.
The Depositary has advised the Company that it is (i) a limited-purpose
trust company organized under the laws of the State of New York, (ii) is a
member of the Federal Reserve System, (iii) a "clearing operation" within the
meaning of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depositary was
created to hold securities for its participating organizations (collectively,
the "Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Qualified institutional buyers may elect to hold Exchange Notes
purchased by them through the Depositary. Qualified institutional buyers who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through Participants or Indirect Participants. Persons that are
not qualified institutional buyers may not hold Exchange Notes through the
Depositary.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with an interest
in the Global Note and (ii) ownership of the Exchange Notes will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the Depositary's
Participants), the Depositary's Participants and the Depositary's Indirect
Participants. The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own and that security
interests in negotiable instruments can only be perfected by delivery of
certificates representing the instruments. Consequently, the ability to transfer
Exchange Notes or to pledge the Exchange Notes as collateral will be limited to
such extent.
So long as the Depositary or its nominee is the registered owner or holder
of the Global Note, the Depositary or such nominee will be considered the sole
owner or holder of the Exchange Notes represented by the Global Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in the Global Note will not be entitled to have Exchange Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Notes, and will not be
considered the owners or holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in Exchange Notes represented by the Global Note to pledge
such interest to persons or entities that do not participate in the Depositary's
system, or to otherwise take actions with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each qualified institutional buyer owing a beneficial interest
in the Global Note must rely on the procedures of the Depositary and, if such
qualified institutional buyer is not a Participant or an Indirect Participant,
on the procedures of the Participant through which such qualified institutional
buyer owns its interest, to exercise any rights of a holder under the Indenture
or the Global Note. The Company understands that under existing industry
practice, in the event the Company requests any action of holders of Exchange
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<PAGE> 86
Notes or a qualified institutional buyer that is an owner of a beneficial
interest in the Global Note desires to take any action that the Depositary, as
the holder of the Global Note, is entitled to take, the Depositary would
authorize the Participants to take such action and the Participants would
authorize the qualified institutional buyers owning through such Participants to
take such action or would otherwise act upon the instructions of such qualified
institutional buyers. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records of the Depositary or
for maintaining, supervising or reviewing any records of the Depositary relating
to the Notes.
Payments with respect to the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Exchange Notes represented by the Global Note
registered in the name of the Depositary or its nominee on the applicable record
date will be payable by the Trustee to or at the direction of the Depositary or
its nominee in its capacity as the registered holder of the Global Note
representing such Exchange Notes under the Indenture. Under the terms of the
Indenture, the Company and the Trustee may treat the persons in whose names the
Exchange Notes, including the Global Note, are registered as the owners thereof
for the purpose of receiving such payments and for any and all purposes
whatsoever. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Exchange Notes. The Company believes, however, that it is currently
the policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the Global Note as shown on the records of
the Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Exchange Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
Neither the Company nor the Trustee will be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related Exchange Notes and the Company and the Trustee
may conclusively rely on, and will be protected in relying on, instructions from
the Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts of the Exchange Notes to be
issued).
The Indenture requires that payments in respect of the Exchange Notes
having a principal amount in excess of $1.0 million (including principal,
premium, if any, interest and Liquidated Damages, if any) be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Secondary trading in long-term notes and debentures of corporate
issuers is generally settled in clearing-house or next-day funds. In contrast,
the Exchange Notes represented by the Global Note are expected to be eligible to
trade in the PORTAL market and to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
Exchange Notes will, therefore, be required by the Depositary to be settled in
immediately available funds.
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Certificated Notes. Upon any such issuance, the Trustee is required
to register such Certificated Notes in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). All such
Certificated Notes evidencing Private Notes will be subject to the legend
requirements applicable to the Private Notes. In addition, if (i) the Company
notifies the Trustee in writing that the Depositary is no longer willing or able
to act as a depository and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Exchange Notes in definitive
form under the Indenture, then, upon surrender by the Depositary of the Global
Note, Certificated Notes will be issued to each person that the Depositary
identifies as being the beneficial owner of the Exchange Notes represented by
the Global Note.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources the Company
believes to be reliable. The Company will have no responsibility for the
performance by the Depositary or its Participants of their respective
obligations as described hereunder or under the rules and procedures governing
their respective operations.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Latham & Watkins, counsel to the Company, the following
are the material federal tax income consequences expected to result to Holders
whose Private Notes are exchanged for Exchange Notes in the Exchange Offer. This
discussion is based upon current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary view,
and no ruling from the Service has been or will be sought with respect to the
Exchange Offer. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to Holders. Certain Holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
LAWS.
The exchange of Private Notes for Exchange Notes will be treated as
"non-event" for federal income tax purposes because the Exchange Notes will not
be considered to differ materially in kind or extent from the Private Notes. As
a result, no material federal income tax consequences will result to Holders
exchanging Private Notes for Exchange Notes.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with the resale of Exchange Notes received in
exchange for Private Notes where such Private Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of up to 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the Holders of Private Notes (including any broker-dealers), and
certain parties related to such Holders, against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes offered hereby
will be passed upon for the Company by Latham & Watkins, New York, New York.
Rhoads & Sinon LLP, Harrisburg, Pennsylvania, will pass upon certain matters of
New Jersey law on behalf of the Company.
EXPERTS
The consolidated financial statements and schedule of the Company and its
subsidiaries as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The reports of
KPMG Peat Marwick LLP refer to changes in 1993 in the method of accounting for
post-retirement benefits other than pensions and income taxes.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. As a result of the Exchange Offer, the
Company will become subject to the informational requirements of the Exchange
Act. The Registration Statement (and the exhibits and schedules thereto), as
well as the periodic reports and other information filed by the Company with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1400,
75 Park Place, New York, New York 10007 and Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 6061-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
its public reference facilities in New York, New York and Chicago, Illinois at
the prescribed rates. Additionally, the Commission maintains a Web site that
contains reports, proxy and information statements regarding registrants that
file electronically with the Commission and the address of this site is
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered Holders of the Notes, without cost to the Trustee or such
registered Holders, copies of all reports and other information that would be
required to be filed by the Company with the Commission under the Exchange Act,
whether or not the Company is then required to file reports with the Commission.
As a result of this Exchange Offer, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act. In
the event that the Company ceases to be subject to the informational
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes remain outstanding, it will file with the Commission (but only if the
Commission at such time is accepting such voluntary filings) and distribute to
Holders of the Private Notes or the Exchange Notes, as applicable, copies of the
financial information that would have been contained in such annual reports and
quarterly reports, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that would have been required to
be filed with the Commission pursuant to the Exchange Act. The Company will also
furnish such other reports as it may determine or as may be required by law.
The principal address of the Company is 2323 Reach Road, Williamsport,
Pennsylvania 17701, and the Company's telephone number is (717) 326-0502.
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SHOP-VAC CORPORATION AND SUBSIDAIRIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995
and September 30, 1996 (Unaudited)............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994,
and 1995 and Nine Months Ended September 30, 1995 and 1996 (Unaudited)........... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1993, 1994, and 1995 and Nine Months Ended September 30, 1996
(Unaudited)...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and Nine Months Ended September 30, 1995 and 1996 (Unaudited)........... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 91
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Shop-Vac Corporation:
We have audited the accompanying consolidated balance sheets of Shop-Vac
Corporation and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Shop-Vac
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in notes 6 and 7 to the consolidated financial statements, the
Company changed its method of accounting for postretirement benefits other than
pensions and income taxes in 1993.
/s/ KPMG PEAT MARWICK LLP
- ---------------------------------------------------------
Harrisburg, Pennsylvania
March 6, 1996, except as to the second
paragraph of Note 3, which is as of
August 28, 1996 and the third
paragraph of Note 3, which is as of
October 1, 1996
F-2
<PAGE> 92
SHOP-VAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,167 $ 2,682 $ 3,142
Accounts and notes receivable, less allowance for
doubtful receivables of $1,833 in 1994, $1,725 in 1995
and $1,579 in 1996 (unaudited)........................... 33,027 31,262 35,100
Inventories................................................. 38,547 28,020 28,945
Deferred income tax benefit................................. 2,101 -- --
Prepaid expenses and other current assets................... 7,481 4,618 4,722
Net current assets of discontinued operations............... 67,108 19,029 21,252
-------- -------- --------
Total current assets.......................................... 150,431 85,611 93,161
Property, plant, and equipment, net........................... 33,554 36,503 32,588
Property, plant, and equipment under capital leases, net...... 9,230 10,080 9,946
Other assets.................................................. 4,960 3,286 1,940
Net noncurrent assets of discontinued operations.............. 54,407 -- --
-------- -------- --------
$252,582 $135,480 $ 137,635
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt........................... $ 7,515 $ 6,258 $ 6,819
Accounts payable............................................ 54,677 36,372 33,913
Accrued expenses............................................ 9,038 19,005 32,318
-------- -------- --------
Total current liabilities..................................... 71,230 61,635 73,050
Deferred income taxes......................................... 2,623 -- --
Long-term debt................................................ 86,789 89,392 93,687
Other liabilities............................................. 9,034 26,054 12,506
-------- -------- --------
Total liabilities................................... 169,676 177,081 179,243
-------- -------- --------
Stockholders' equity (deficit):
Common stock, Class A voting, no par, 20,000 shares
authorized, 6,500 shares issued. Class B
nonvoting, no par, 1,000,000 shares authorized,
650,000 shares issued.................................... 85 85 85
Paid-in capital............................................. 110 110 110
Retained earnings (deficit)................................. 83,414 (44,764) (44,937)
Equity adjustment from foreign currency translation......... (703) 2,968 3,134
-------- -------- --------
Total stockholders' equity (deficit)................ 82,906 (41,601) (41,608)
-------- -------- --------
$252,582 $135,480 $ 137,635
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 93
SHOP-VAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................ $224,726 $ 250,843 $ 231,323 $165,135 $151,308
Cost of sales.................... 162,710 182,694 179,416 127,229 113,980
-------- --------- --------- -------- --------
Gross profit..................... 62,016 68,149 51,907 37,906 37,328
Selling, general, and
administrative expense......... 38,421 41,867 35,637 27,442 24,044
Restructuring charges............ -- -- -- -- 4,714
-------- --------- --------- -------- --------
Income from operations........... 23,595 26,282 16,270 10,464 8,570
Interest expense................. 7,210 8,826 11,629 8,966 7,175
Non-operating expense (income),
net............................ (870) 9 459 299 396
-------- --------- --------- -------- --------
Income from continuing operations
before income taxes and
cumulative effect of changes in
accounting principles.......... 17,255 17,447 4,182 1,199 999
Income taxes..................... 5,130 4,964 1,425 1,006 1,172
-------- --------- --------- -------- --------
Income (loss) from continuing
operations before cumulative
effect of changes in accounting
principles..................... 12,125 12,483 2,757 193 (173)
-------- --------- --------- -------- --------
Discontinued operations:
Loss from operations of
discontinued business, net
of income tax benefit....... (4,148) (4,525) (10,639) (6,397) --
Loss on disposal of
discontinued business, net
of income tax benefit....... -- -- (120,296) -- --
-------- --------- --------- -------- --------
Loss on discontinued
operations..................... (4,148) (4,525) (130,935) (6,397) --
-------- --------- --------- -------- --------
Income (loss) before cumulative
effect of changes in accounting
principles..................... 7,977 7,958 (128,178) (6,204) (173)
Cumulative effect of changes in
accounting principles, net of
income tax benefit............. (1,049) -- -- -- --
-------- --------- --------- -------- --------
Net income (loss)................ $ 6,928 $ 7,958 $(128,178) $ (6,204) $ (173)
======== ========= ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 94
SHOP-VAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
EQUITY
SHARES ISSUED ADJUSTMENT TOTAL
-------------------- RETAINED FROM FOREIGN STOCKHOLDERS'
CLASS A CLASS B PAID-IN EARNINGS CURRENCY EQUITY
VOTING NON-VOTING AMOUNT CAPITAL (DEFICIT) TRANSLATION (DEFICIT)
------- ---------- ------ ------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993... 6,500 650,000 $ 85 $ 110 $ 68,534 $ 393 $ 69,122
Net income................. -- -- -- -- 6,928 -- 6,928
Equity adjustment from
foreign currency
translation.............. -- -- -- -- -- (3,511) (3,511)
--
----- ------- --- -------- -------- --------
Balance, December 31,
1993..................... 6,500 650,000 85 110 75,462 (3,118) 72,539
Net income................. -- -- -- -- 7,958 -- 7,958
Equity adjustment from
foreign currency
translation.............. -- -- -- -- -- 2,415 2,415
Redemption of minority
interest in subsidiary... -- -- -- -- (6) -- (6)
--
----- ------- --- -------- -------- --------
Balance, December 31,
1994..................... 6,500 650,000 85 110 83,414 (703) 82,906
Net loss................... -- -- -- -- (128,178) -- (128,178)
Equity adjustment from
foreign currency
translation.............. -- -- -- -- -- 3,671 3,671
--
----- ------- --- -------- -------- --------
Balance, December 31,
1995..................... 6,500 650,000 85 110 (44,764) 2,968 (41,601)
Net loss (unaudited)....... -- -- -- -- (173) -- (173)
Equity adjustment from
foreign currency
translation
(unaudited).............. -- -- -- -- -- 166 166
--
----- ------- --- -------- -------- --------
Balance, September 30, 1996
(unaudited).............. 6,500 650,000 $ 85 $ 110 $ (44,937) $ 3,134 $ (41,608)
===== ======= == === ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 95
SHOP-VAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 6,928 $ 7,958 $(128,178) $ (6,204) $ (173)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization................. 4,278 5,054 6,132 4,586 5,963
Loss on disposal of discontinued operations... -- -- 120,296 -- --
Restructuring charges:
Goodwill writeoff........................... -- -- -- -- 1,047
Other non-cash charges...................... -- -- -- -- 523
Other accrued expenses...................... -- -- -- -- 3,144
Cumulative effect of changes in accounting
principles.................................. 1,049 -- -- -- --
Changes in assets and liabilities:
Accounts and notes receivable............... 4,139 (6,807) 609 (4,675) (3,909)
Inventories................................. (6,298) (8,557) 11,086 (588) (1,109)
Prepaid expenses and other current assets... 987 (4,215) 3,015 2,877 (518)
Discontinued operations -- working capital
changes and noncash charges.............. (11,360) (7,102) (9,317) (460) (3,151)
Other assets................................ (1,138) (773) 1,763 2,149 (1,281)
Accounts payable and accrued expenses....... 4,527 14,274 (27,994) (16,763) 6,909
Deferred income taxes....................... (536) 1,480 (412) 79 --
Other liabilities........................... 4,063 2,395 4,070 (4,157) (11,811)
------- -------- -------- -------- --------
Net cash provided (used) by operating activities... 6,639 3,707 (18,930) (23,156) (4,366)
------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures............................. (7,656) (7,838) (8,042) (7,614) (155)
Proceeds from sale of property and equipment..... -- 66 222 -- --
Proceeds from sale of discontinued operations.... -- -- 30,000 -- --
Investing activities of discontinued
operations.................................... (7,153) (12,618) (2,887) (2,306) --
------- -------- -------- -------- --------
Net cash provided (used) by investing activities... (14,809) (20,390) 19,293 (9,920) (155)
------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from revolving line-of-credit, net...... 7,067 14,933 18,063 24,382 8,193
Payment of term loan............................. (4,000) (4,000) (8,000) -- --
Payment of private placement notes............... -- -- (9,238) -- (770)
Payment of industrial development revenue
bonds......................................... (500) (500) (500) (400) (2,300)
Proceeds from issuance of priority revolving
line-of-credit................................ -- -- 16,044 16,044 --
Payment of priority revolving line-of-credit..... -- -- (16,044) (10,018) --
Proceeds from issuance of other long-term debt... 5,121 6,700 3,139 4,484 1,207
Other long-term debt and capital lease
payments...................................... (1,442) (1,498) (3,234) (621) (1,474)
------- -------- -------- -------- --------
Net cash provided by financing activities.......... 6,246 15,635 230 33,871 4,856
------- -------- -------- -------- --------
Effect of exchange rate changes on cash............ -- 116 (78) 65 125
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (1,924) (932) 515 860 460
Cash and cash equivalents, beginning of period..... 5,023 3,099 2,167 2,167 2,682
------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 3,099 $ 2,167 $ 2,682 $ 3,027 $ 3,142
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 96
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Shop-Vac Corporation is a multi-national engineering, manufacturing and
distribution concern. The Company's principal line of business is wet/dry vacuum
cleaners for consumer and industrial applications. The primary markets for the
Company's products are the United States, Canada, Mexico, Australia, and Europe.
The Company's primary customers include major discount retailers and major
hardware and home center retailers. Sales and related cost of goods sold are
recognized based upon shipment of products.
Principles of Consolidation
The consolidated financial statements include the accounts of Shop-Vac
Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates in the Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Translation of Foreign Currency
The functional currency for the Company's foreign operations is the
applicable local currency. The translation of the applicable foreign functional
currencies into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate experienced during the
period. The gains or losses resulting from such translations, net of income tax,
are included in stockholders' equity (deficit). Gains or losses resulting from
foreign currency transactions are included in results of operations.
Foreign Currency Instruments
The Company enters into foreign exchange forward contracts to hedge certain
foreign currency transactions. These transactions include purchases of motors
denominated in Italian lire and collections of accounts receivable denominated
in German marks and other European currencies by the Company's Irish
manufacturing subsidiary as well as collection of intercompany amounts due from
the Company's Canadian subsidiary resulting from its purchase of product
manufactured by the Company. These contracts are purchased to reduce the impact
of foreign currency fluctuations on operating results. The Company enters into
these financial instruments utilizing over-the-counter as opposed to exchange
traded instruments. Assuming performance by the contracting parties, these
contracts do not subject the Company to risk due to exchange rate movements as
gains and losses on the contracts offset gains and losses on the transactions
being hedged. The contracts are settled in cash upon expiration, resulting in a
gain or loss measured by the difference between the spot rate and the contract
rate at expiration. The Company does not hedge firm commitments beyond two
years. The Company reduces the risk of losses due to nonperformance by
counterparties by only entering into agreements with major international
financial institutions. At December 31, 1994 and 1995 and
F-7
<PAGE> 97
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1996, the Company had foreign exchange forward contracts
outstanding as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Irish punt against Italian lira.............. $ 36,145 $ 22,036 $ 8,733
Irish punt against German mark............... 11,779 6,159 1,041
Irish punt against British pound............. 12,850 1,249 --
Irish punt against French franc.............. 6,392 1,184 --
Irish punt against U.S. dollar............... 2,866 296 --
Irish punt against Dutch guilder............. 1,489 269 --
Canadian dollar against U.S. dollar.......... 9,726 3,620 2,516
Other currencies............................. 12,653 1,347 587
-------- -------- --------
$ 93,900 $ 36,160 $12,877
======== ======== ========
</TABLE>
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts and notes
receivable, accounts payable, and current portion of long-term debt approximate
fair values due to the short-term maturities of these instruments.
The fair values of the long-term portion of the Company's debt instruments
are based on the amount of future cash flows associated with each instrument
discounted using the Company's current borrowing rate for similar debt
instruments of comparable maturity. The amount reported in the consolidated
balance sheet for long-term debt approximates fair value.
The fair value of accounts receivables sold with recourse approximates the
outstanding balances of those accounts receivable at each balance sheet date.
The fair value of the Company's foreign exchange forward contracts are
estimated based on the difference between the contracted exchange rate and the
spot rate at each balance sheet date. The fair value of such contracts was an
obligation of $386,000 and $1,020,000 at December 31, 1994 and 1995,
respectively. The fair value of such contracts was an asset of $316,000 at
September 30, 1996 (unaudited). The financial statements include no carrying
amounts with respect to these contracts.
Inventories
Inventories are stated at the lower of cost or market. Cost for most
foreign inventories has been determined on the first-in, first-out (FIFO) basis.
Cost for most domestic inventories has been determined on the last-in, first-out
(LIFO) basis. At December 31, 1994 and 1995 and September 30, 1996,
approximately 71%, 68% and 59% (unaudited), respectively, of total inventories
are stated on the LIFO method. If the FIFO cost method had been used with
respect to such inventories, total inventories would have been approximately
$3,045,000, $2,925,000 and $2,925,000 (unaudited) higher at December 31, 1994
and 1995 and September 30, 1996, respectively.
F-8
<PAGE> 98
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories are classified as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- ------- SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................................... $23,614 $17,613 $16,865
Work-in-process.................................... 332 481 109
Finished goods..................................... 14,601 9,926 11,971
-------- -------- --------
$38,547 $28,020 $28,945
======== ======== ========
</TABLE>
Property, Plant, and Equipment and Depreciation
Property, plant, and equipment are valued at cost less accumulated
depreciation. Depreciation of property, plant, and equipment is computed for
financial statement purposes on straight-line and declining balance methods over
the estimated useful lives of the property and, in some instances, on differing
methods and over different lives for income tax purposes. Leasehold improvements
are amortized over the shorter of the life of the asset or the terms of the
related leases.
Expenditures for maintenance, repairs and renewals are generally charged to
earnings as incurred. Renewals of significant items are capitalized.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Earnings of foreign operations are reinvested in the business
and no provision for domestic income tax or foreign withholding tax is made on
such earnings until distributed (see note 7).
Foreign Government Grants
The Company recognizes foreign government grants relating to the training
and continued employment of certain personnel as a reduction in relevant
expenses in the period in which related costs are incurred. Foreign government
grants received by the Company toward the purchase of equipment and by lessors
of equipment leased by the Company under capital leases are recorded as a
reduction in the cost of the acquired or leased asset (see note 10). The Company
received government grants relating to equipment amounting to $159,000 in 1994.
The Company did not receive government grants for the years ended December 31,
1993 and 1995 and the nine months ended September 30, 1996 (unaudited).
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Research and Development Costs
Research and development costs are expensed as incurred. Such expenses were
approximately $757,000, $547,000 and $344,000 in 1993, 1994, and 1995,
respectively, and $271,000 (unaudited) and $219,000 (unaudited) for the
nine-month periods ended September 30, 1995 and 1996, respectively.
F-9
<PAGE> 99
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Retirement Benefit Plans
Substantially all domestic employees participate in noncontributory pension
plans and substantially all non-U.S. employees participate in contributory or
noncontributory pension plans. Pension accounting information is disclosed in
note 6 to the consolidated financial statements.
Statement of Cash Flows
Cash in excess of daily requirements is invested in short-term marketable
securities with an original maturity of three months or less. Such investments
are deemed to be cash equivalents for purposes of the statement of cash flows.
Supplemental disclosure of cash flow information (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for interest..................... $7,427 $8,679 $11,879 $9,164 $7,435
Cash paid for income taxes................. 965 3,861 1,176 1,407 584
Capital lease obligations for new property,
plant, and equipment..................... 112 5,895 1,654 1,654 558
</TABLE>
(2) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
------------------- 30,
1994 1995 1996
------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................................... $ 1,579 $ 1,599 $ 1,595
Buildings and improvements.................................... 18,642 18,912 18,882
Machinery and equipment....................................... 59,503 68,614 69,094
Construction in progress...................................... 4,576 1,961 730
------- ------- -------
84,300 91,086 90,301
Less accumulated depreciation................................. 50,746 54,583 57,713
------- ------- -------
Net property, plant, and equipment............................ $33,554 $36,503 $32,588
======= ======= =======
</TABLE>
Property, plant, and equipment under capital leases consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
---------------- 30,
1994 1995 1996
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Buildings.................................................... $4,244 $ 4,274 $ 4,184
Machinery and equipment...................................... 7,817 9,501 10,102
------- ------- ------
12,061 13,775 14,286
Less accumulated amortization................................ 2,831 3,695 4,340
------- ------- ------
Net property, plant, and equipment under capital leases...... $9,230 $10,080 $ 9,946
======= ======= ======
</TABLE>
F-10
<PAGE> 100
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) LONG-TERM DEBT
Details of the Company's long-term debt are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER PRO FORMA
------------------- 30, SEPTEMBER 30,
1994 1995 1996 1996
------- ------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revolving line of credit............. $30,618 $48,681 $56,874 --
Private placement notes.............. 40,000 30,762 29,992 --
Industrial development revenue
bonds.............................. 2,800 2,300 -- --
Term loan............................ 8,000 -- -- --
10 5/8% Senior Secured Notes due
2003............................... -- -- -- 100,000
Capital lease agreements, interest at
rates ranging from 4% to 11.35%.... 11,211 10,038 8,564 8,564
Other, substantially foreign,
interest at average rate of 9.5%... 1,675 3,869 5,076 5,076
------- ------- ------- --------
94,304 95,650 100,506 113,640
Less current installments............ 7,515 6,258 6,819 6,819
------- ------- ------- --------
$86,789 $89,392 $93,687 $ 106,821
======= ======= ======= ========
</TABLE>
At January 1, 1996, the Company was not in compliance with certain
covenants of the revolving line of credit agreement and private placement note
agreement. In addition, the Company did not make the required annual principal
payment of $6.7 million due on the private placement notes on April 30, 1996.
(The private placement notes required annual principal payments of $6,700,000
through 1999 with final maturity of $3,962,000 in April 2000.) On August 28,
1996, the Company entered into Amendment Agreements with the holders of the
private placement notes and the lender under the revolving line of credit which
suspended the relevant financial covenants and payment dates with respect to
payments due or past due under either the private placement notes or the
revolving line of credit to provide that no principal payments will become due
until October 31, 1996. Furthermore, the revolving line of credit lender will
provide an additional $7.5 million of availability (maximum $62.5 million) from
August 28, 1996 through October 31, 1996 (the "Priority Facility"), the proceeds
of which were used to make a $770,389 principal payment with respect to the
private placement notes, to pay $307,621 in amendment fees to the holders of the
private placement notes, to make a $112,500 facility fee payment upon closing
the Priority Facility and for working capital and general corporate purposes.
The Amendment Agreements require the Company to comply with certain covenants
through October 31, 1996, including limitation on capital expenditures and asset
dispositions, as well as providing periodic financial information to the
lenders.
On October 1, 1996, the Company issued $100 million of senior secured
notes. The notes bear interest, payable semi-annually, at 10 5/8% and mature on
September 1, 2003. The net proceeds from the issuance of the notes were
approximately $95.6 million after payment of $3.5 million in underwriters
discounts and approximately $900,000 in expenses related to the offering. The
net proceeds were used to repay $57.5 million outstanding under the Company's
existing revolving line of credit and priority facility, $30.0 million of
outstanding 10.83% private placement notes due 2001 and $2.5 million of related
prepayment fees and expenses, which were expensed. The remaining proceeds will
be used for general corporate purposes. The interest expense for the year ended
December 31, 1995 and the nine months ended September 30, 1996 on a pro forma
basis assuming the senior secured notes were issued at the beginning of the year
was $12.8 million (unaudited) and $9.5 million (unaudited), respectively. Also
on October 1, 1996, the Company established a new revolving credit facility for
up to $25 million, subject to a borrowing base limitation based on the aggregate
of certain percentages of the eligible accounts receivable and eligible
inventory of the Company and its domestic subsidiaries. The new revolving credit
facility expires in 1999 and bears interest, at the Company's
F-11
<PAGE> 101
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option, at either: 0.75% plus the higher of the federal funds rate plus 0.5% per
annum or the lender's prime commercial lending rate (9.0% at October 1, 1996);
or LIBOR plus 2% (7.375% at October 1, 1996). The agreements with the lenders of
the senior secured notes and the new revolving credit facility contain financial
and operating covenants requiring the Company to maintain certain financial
ratios, limiting capital expenditures and restricting its ability to incur
indebtedness, make investments and create or permit certain liens. The
obligations related to the prior revolving line of credit and the private
placement notes were in default at January 1, 1996. These obligations are
reported in the accompanying balance sheet as long-term as a result of the
issuance of the senior secured notes and the use of the proceeds to repay the
prior revolving line of credit and the private placement notes. Based on this
refinancing, the Company's future principal payments on long-term debt for the
next five years are approximately as follows: 1996 - $6,258,000;
1997 - $2,300,000; 1998 - $2,455,000; 1999 - $2,454,000; and 2000 - $894,000.
The Company's prior revolving line of credit bore interest at the lender's
adjusted base rate which was 9.25% at December 31, 1995 and 9.0% (unaudited) at
September 30, 1996. The total availability at December 31, 1995 was $55 million
of which $48,681,000 was outstanding. At December 31, 1995 and September 30,
1996 (unaudited), the private placement notes' interest rate was 10.83%.
The Industrial Development Revenue Bonds bear interest at a variable rate
determined periodically (6.23% at December 31, 1995). The bonds were secured at
December 31, 1995 by an irrevocable letter of credit from a financial
institution in the amount of $2,370,000. The bonds were redeemed in June 1996
(unaudited).
The Company currently leases a sales/administration/distribution facility
in England from a company controlled by the stockholders of the Company. This
lease has been recorded as a capital lease with annual payments of approximately
$340,000 (interest at 9%) which management believes is comparable to terms for
similar facilities in arms-length transactions. At December 31, 1995, land,
building and equipment under capital lease of $2,192,000 and capital lease
obligations of $2,068,000 have been recognized with respect to this lease. The
Company also guaranteed up to UKL 500,000 (approximately $800,000) of
indebtedness incurred by the company in connection with the company's
acquisition of the facility.
(4) COMMITMENTS AND CONTINGENCIES
It is the opinion of the Company's management and legal counsel that
various claims and litigation in which the Company is currently involved have
been adequately provided for, and any resulting claims or judgments will not
materially affect the Company's business, financial condition, cash flows, or
operations.
Certain of the Company's European operations regularly discount portions of
their trade accounts receivable with local banks. These accounts receivable are
sold to the banks with recourse to the Company to the extent that the accounts
receivable are not collectible by the bank. The sale of these receivables has
been reflected as a reduction of accounts receivable. The discount on the
receivables sold has been included in interest expense. Accounts receivable
approximating $7,932,000, $28,504,000 and $17,171,000 were sold under these
arrangements during the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996 (unaudited), respectively. As of December 31,
1994 and 1995 and September 30, 1996 accounts receivable with outstanding
balances of approximately $4,310,000, $5,391,000 and $4,971,000 (unaudited)
respectively, were held by the banks.
Stockholder Agreement
The Company and its stockholders have entered into an agreement which
provides, in part, for (i) the accrual and payment of an annual dividend equal
to 10% of the net income of the Company (after taxes) which accrues and is
payable commencing upon the death, disability or incapacity of Jonathan Miller
or Matthew Miller, (ii) effective joint control of the Company by Jonathan
Miller and Matthew Miller and (iii) restrictions on the transfer of any of the
Company's stock. The dividend provision set forth in the stockholders
F-12
<PAGE> 102
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement suspends the payment of such dividends to the extent such payment
would result in the breach or violation of the terms, conditions or covenants of
the Company's financing arrangements.
European Operations (unaudited)
The Company intends to terminate the manufacture of steam cleaners at its
facility in France and to consolidate all of its European manufacturing
activities, including the production of steam cleaners, into its facility in
Ireland. In connection with the foregoing consolidation, the Company incurred a
pre-tax charge in the third quarter of 1996 of approximately $1.5 million to
cover severance, lease termination payments, shut-down and related expenses. The
Company also intends to terminate its distribution operations in Austria,
Germany, Hungary, the Netherlands and Spain. In connection with such
termination, the Company incurred a pre-tax charge in the third quarter of 1996
of approximately $3.2 million to cover severance, lease termination payments,
shut-down and related expenses. Although the Company expects that the
termination of these distribution operations will negatively impact sales in the
near-term, the Company expects to continue sales to its major customers in these
markets on a direct basis. In addition, the Company recorded charges of
approximately $200,000 and $600,000 related to accounts receivable and
inventories at these locations. These amounts are recorded in selling, general
and administrative expenses and cost of sales, respectively. Furthermore, the
Company expects to incur approximately $500,000 of additional expenses in the
fourth quarter of 1996 and the first quarter of 1997 related to these locations.
The restructuring charges include approximately $1.8 million for severance
and termination benefits for substantially all employees of the Company's steam
cleaner manufacturing operations and the Company's distribution operations in
Austria, Germany, Hungary, the Netherlands and Spain. Approximately 70 employees
will be terminated as a result of this restructuring.
The restructuring charges also include charges of approximately $500,000 to
recognize the reduction in value of leasehold improvements at leased locations
which are being abandoned as a result of the shut down of the steam cleaner and
distribution operations. Additionally, a loss of $1.0 million is included in the
restructuring charges which recognizes the decline in value to zero of goodwill
associated with the Company's Netherlands distribution operation, which will be
shut down as part of the restructuring.
The remainder of the restructuring charges represents the accrual for lease
terminations and other obligations at September 30, 1996. At September 30, 1996,
no amounts had yet been paid with respect to the restructuring charges.
The Company anticipates the liquidation of these operations to be completed
by March 31, 1997.
Summarized information relating to the Company's distribution operations to
be terminated are presented below for the years ended December 31, 1994 and 1995
and the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net Sales........................................................ 23,759 21,335 10,429
Costs and expenses............................................... 24,645 22,857 11,883
Restructuring charges............................................ -- -- 3,212
------ ------ ------
Loss from operations............................................. (886) (1,522) (4,666)
</TABLE>
Sales by the Company's French steam-cleaner facility are principally
intercompany.
(5) OPERATING LEASES
The Company rents certain real property and machinery and equipment under
operating leases expiring at various dates through 2000. Rental expense under
operating leases, including short-term machinery and
F-13
<PAGE> 103
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equipment rentals, aggregated approximately $530,000 in 1993, $617,000 in 1994
and $873,000 in 1995, and approximately $684,000 (unaudited) and $626,000
(unaudited) for the nine-month periods ended September 30, 1995 and 1996,
respectively.
Future minimum lease payments required under all noncancelable operating
leases of continuing operations at December 31, 1995 are approximately as
follows (dollars in thousands):
<TABLE>
<S> <C>
1996........................................ $1,034
1997........................................ 562
1998........................................ 391
1999........................................ 237
2000........................................ 79
------
Total minimum lease payments................ $2,303
======
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
The Company provides non-contributory, defined benefit pension plans
covering substantially all domestic personnel. The benefits are based on average
compensation and the number of years of service. The Company's funding policy is
to contribute the recommended amount based on the calculations of the plans'
consulting actuary.
The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheet (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $5,913 in 1994 and $7,531 in 1995.............. $(6,406) $ (8,246)
======= ========
Projected benefit obligation for service rendered to date....... $(9,521) $(10,515)
Plan assets at fair value, primarily short-term marketable
securities and mutual funds................................... 7,438 8,744
------- --------
Projected benefit obligation in excess of plan assets........... (2,083) (1,771)
Unrecognized prior service cost................................. 70 57
Unrecognized net loss........................................... 2,073 1,294
Unrecognized net transition obligation.......................... (100) (88)
------- --------
Accrued pension cost included in accounts payable
and accrued expenses.......................................... $ (40) $ (508)
======= ========
</TABLE>
Net periodic pension cost includes the following components (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the period........ $ 947 $ 1,298 $ 1,478
Interest cost on projected benefit obligations........ 503 643 720
Return on plan assets................................. (452) (524) (714)
Net amortization and deferral......................... 20 154 222
------- ------- -------
Net periodic pension cost............................. $ 1,018 $ 1,571 $ 1,706
======= ======= =======
</TABLE>
A weighted-average discount rate of 8% in 1993 and 1994 and 7.5% in 1995
and a rate of increase in future compensation levels of 5% in 1993 and 1994 and
4% in 1995 were used in determining the actuarial
F-14
<PAGE> 104
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
present value of the projected benefit obligation. The expected long-term rate
of return on assets was 8.9% in 1993, 1994, and 1995.
Certain U.S. employees of the Company are eligible to participate in the
Shop-Vac Employees' Savings Plan. This plan allows employees to contribute up to
15% of their earnings as pretax contributions. The Company also makes matching
contributions to each participant's account equal to 25% of the amount
contributed by the employee, up to a maximum employee contribution of 6%. The
Company's contributions to this plan totaled approximately $134,000, $170,000,
and $173,000 during the years ended December 31, 1993, 1994, and 1995,
respectively.
Until March 31, 1995, certain executive officers of the Company were
eligible to participate in the Shop-Vac Executive Benefit Trust, a nonqualified
deferred compensation plan. This plan allowed participants to contribute up to
30%, 40%, and 40% of their earnings as pretax contributions for the years ended
December 31, 1993, 1994, and 1995, respectively. The Company also made matching
contributions to each participant's account equal to 75% of the amount
contributed by the employee, up to a maximum employee contribution of 6%. The
Company's contributions to this plan totaled approximately $172,000, $260,000,
and $64,000 during the years ended December 31, 1993, 1994, and 1995,
respectively. This plan was terminated in 1995.
Prior to April 6, 1993, the Company contributed to a union security plan.
Contributions to this security plan amounted to $101,000 in 1993. Employees
voted to decertify the union which represented them effective April 6, 1993.
This action resulted in the cessation of the Company's obligation to contribute
to the union's pension and health and welfare funds. These employees are now
covered by the benefit plans of the Company. The Company has reflected the
estimated withdrawal liability under the multi-employer plan in the accompanying
consolidated financial statements.
Certain employees are also covered by a retirement benefit plan providing
prescription drug benefits. The plan is not funded. The Company accounts for
these costs by accruing for them over the employee service period. The Company
adopted the provisions of SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, during 1993. The effect of this accounting change
was a non-cash charge of $1,568,000 before income taxes ($949,000 after income
taxes.) The accumulated benefit obligation at December 31, 1994 and 1995 was
$1,422,000 and $1,279,000, respectively, and is reflected in other liabilities
in the accompanying consolidated balance sheet. The benefit obligation was
calculated using a discount rate of 8% and 7.5% at December 31, 1994 and 1995,
respectively, and a 5% annual rate of increase in the cost of covered benefits.
The effect of a one percentage point increase in the annual rate would increase
the accumulated benefit obligation by approximately 13%.
(7) INCOME TAXES
During 1993, the Company adopted the provisions of SFAS No. 109, Accounting
for Income Taxes, which requires a change from the deferred method of accounting
for income taxes to the asset and liability method. The cumulative effect of
this accounting change was a charge of $100,000 and has been reflected in the
consolidated statement of operations for the year ended December 31, 1993. The
$100,000 cumulative effect reflects the previously unrecognized tax effect of
differences between the financial statement bases and tax bases of certain
assets and liabilities in the Company's consolidated financial statements,
primarily inventories and fixed assets. Purchase accounting adjustments to
certain assets and liabilities recorded net of related income tax effects have
been adjusted as part of the cumulative effect, to reflect the related deferred
taxes or future income tax benefits in the consolidated balance sheet.
F-15
<PAGE> 105
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense (benefit) is allocated as follows (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income from operations.................... $ 5,130 $ 4,964 $ 1,425 $ 1,006 $1,172
Cumulative effect of changes in accounting
principles.............................. (519) -- -- -- --
Results of discontinued operations........ (1,553) (1,195) (76) (2,506) --
Loss on disposal of discontinued
business................................ -- -- (454) -- --
------ ----- ------- ------- -------
$ 3,058 $ 3,769 $ 895 $(1,500) $1,172
====== ===== ======= ======= =======
</TABLE>
The domestic and foreign components of income (loss) from continuing
operations before income taxes and cumulative effect of change in accounting
principles are as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Domestic................................ $10,024 $10,595 $3,150 $ 172 $4,303
Foreign................................. 7,231 6,852 1,032 1,027 (3,304)
------ --- ------ ------- -------
$17,255 $17,447 $4,182 $1,199 $ 999
====== === ====== ======= =======
</TABLE>
The difference between the expected income tax expense from continuing
operations at the statutory federal income tax rate of 35% and the actual income
tax expense from continuing operations as reflected in the accompanying
consolidated financial statements is as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ------------------
1993 1994 1995 1995 1996
------ ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expense at statutory rate............... $6,039 $ 6,106 $1,464 $ 420 $ 350
State income tax, net................... 323 339 64 9 41
Foreign taxes........................... (664) (1,104) 70 577 2,357
Change in beginning of year valuation
allowance for deferred tax assets
allocated to income tax expense....... -- -- -- -- (1,576)
Foreign tax credits..................... (326) (310) -- -- --
Other................................... (242) (67) (173) -- --
------ ---- ------ ------ ------
Total provision for income taxes from
continuing operations................. $5,130 $ 4,964 $1,425 $1,006 $1,172
====== ==== ====== ====== ======
</TABLE>
F-16
<PAGE> 106
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of income tax expense (benefit) from continuing operations are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
DEFERRED
--------------------
CURRENT CURRENT NONCURRENT TOTAL
------- ------- ---------- ------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Federal........................................... $ 2,324 $ 1,315 $ (873) $2,766
Foreign........................................... 2,196 (394) 65 1,867
State............................................. 418 238 (159) 497
------- ------- ------- -------
$ 4,938 $ 1,159 $ (967) $5,130
======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1994
Federal........................................... $ 1,861 $ (490) $ 1,777 $3,148
Foreign........................................... 1,514 (27) (193) 1,294
State............................................. 178 (131) 475 522
------- ------- ------- -------
$ 3,553 $ (648) $ 2,059 $4,964
------- ------- ------- -------
YEAR ENDED DECEMBER 31, 1995
Federal........................................... $ 1,309 $ 2,037 $ (2,451) $ 895
Foreign........................................... 493 (162) 100 431
State............................................. 145 226 (272) 99
------- ------- ------- -------
$ 1,947 $ 2,101 $ (2,623) $1,425
------- ------- ------- -------
NINE MONTHS ENDED SEPTEMBER 30,
1995 (UNAUDITED)
Federal........................................... $ 56 $ 87 $ (87) $ 56
Foreign........................................... 858 (3) 82 937
State............................................. 13 20 (20) 13
------- ------- ------- -------
$ 927 $ 104 $ (25) $1,006
======= ======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30,
1996 (UNAUDITED)
Federal........................................... $ 4 $(1,491) $ 1,491 $ 84
Foreign........................................... 1,025 -- -- 1,025
State............................................. 63 (213) 213 63
------- ------- ------- -------
$ 1,172 $(1,704) $ 1,704 $1,172
======= ======= ======= =======
</TABLE>
F-17
<PAGE> 107
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts.................................... $ 558 $ 504 $ 434
Inventories, including uniform capitalization........... 24 475 400
Compensated absences and postretirement benefits
principally due to accrual for financial reporting
purposes............................................. 2,234 1,871 1,687
Liabilities due to accrual for financial reporting
purposes............................................. 514 6,945 4,993
Credit carryovers....................................... 4,078 5,697 5,781
Loss carryforward from discontinued operations.......... 2,754 21,149 21,170
Other................................................... 752 331 1,002
-------- -------- --------
Total gross deferred tax assets........................... 10,914 36,972 35,467
Less valuation allowance.................................. 6,739 33,704 32,128
-------- -------- --------
4,175 3,268 3,339
-------- -------- --------
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation
and capitalized interest............................. 3,782 3,119 3,277
Costs deferred for financial reporting currently
deductible for tax................................... 915 149 62
-------- -------- --------
Total gross deferred tax liabilities...................... 4,697 3,268 3,339
-------- -------- --------
Net deferred tax assets (liabilities)..................... $ (522) $ -- $ --
======== ======== ========
</TABLE>
The valuation allowance for deferred tax assets at January 1, 1995 was
$6,739,000. The net change in valuation allowance for the year ended December
31, 1995 was an increase of $26,965,000 and for the period ended September 30,
1996 was a decrease of $1,576,000 (unaudited).
The Company has not recognized a deferred tax liability for the basis
differences related to the stock in certain foreign subsidiaries since such
differences are primarily related to undistributed earnings and the earnings are
not expected to be remitted and become taxable to the Company in the foreseeable
future. The accumulated amount of such undistributed earnings was approximately
$17,537,000 and $14,837,000 (unaudited) at December 31, 1995 and September 30,
1996, respectively.
At December 31, 1995 and September 30, 1996, the Company has federal
alternative minimum tax credit carryovers of approximately $1,350,000 and
$1,434,000 (unaudited), respectively, which are available to reduce future
regular income taxes, if any, over an indefinite period.
At December 31, 1995 and September 30, 1996 (unaudited), the Company also
has general business credit carryforwards of approximately $454,000 and foreign
tax credit carryforwards of approximately
F-18
<PAGE> 108
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$3,893,000 which are available to offset future federal income taxes. If not
used to reduce federal income taxes these credits will expire as follows
(dollars in thousands):
<TABLE>
<CAPTION>
GENERAL FOREIGN
BUSINESS TAX
CREDIT CREDIT
-------- -------
<S> <C> <C>
December 31, 1997......................................... $ -- 259
December 31, 1998......................................... -- 1,441
December 31, 1999......................................... -- 574
December 31, 2000......................................... -- 1,619
December 31, 2008......................................... 203 --
December 31, 2009......................................... 251 --
</TABLE>
The Company has an estimated tax loss carryforward for income tax purposes
of $48.7 million at December 31, 1995 and September 30, 1996 (unaudited), which
is available to reduce federal income taxes, if any, through 2010 and state
income taxes over various carryforward periods. Based on the Company's
historical and current pretax operating results, future reversals of existing
taxable temporary differences, estimates of future taxable income and available
tax planning strategies, management believes that it is more likely than not
that the recorded deferred tax assets, net of the valuation allowance, will be
realized.
(8) GEOGRAPHIC INFORMATION
The Company and its subsidiaries are primarily engaged in the manufacture
and sale of various types of industrial and consumer shop vacuums. The Company
and subsidiaries operate in various geographic areas as indicated by the
following (dollars in thousands):
<TABLE>
<CAPTION>
EUROPE,
PRINCIPALLY
FRANCE,
GERMANY,
IRELAND AND
THE UNITED
UNITED STATES KINGDOM OTHER ELIMINATIONS CONSOLIDATED
------------- -------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Total sales............................ $ 134,331 $ 82,114 $24,788 $(16,507) $224,726
Operating profit....................... $ 17,172 $ 5,766 $ 657 $ -- $ 23,595
Identifiable assets, $ 34,080 $ -- $106,978
December 31, 1993................... $ 64,738 $ 8,160
Year ended December 31, 1994:
Total sales............................ $ 157,412 $ 85,157 $24,674 $(16,400) $250,843
Operating profit (loss)................ $ 19,418 $ 6,879 $ (15) $ -- $ 26,282
Identifiable assets, $ 42,679 $ -- $131,067
December 31, 1994................... $ 80,860 $ 7,528
Year ended December 31, 1995:
Total sales............................ $ 144,459 $ 77,820 $22,982 $(13,938) $231,323
Operating profit....................... $ 14,458 $ 1,627 $ 185 $ -- $ 16,270
Identifiable assets,
December 31, 1995................... $ 71,203 $ 38,042 $ 7,206 $ -- $116,451
</TABLE>
F-19
<PAGE> 109
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EUROPE,
PRINCIPALLY
FRANCE,
GERMANY,
IRELAND AND
THE UNITED
UNITED STATES KINGDOM OTHER ELIMINATIONS CONSOLIDATED
------------- -------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Nine months ended September 30, 1995
(unaudited):
Total sales............................ $ 100,755 $ 58,035 $16,354 $(10,009) $165,135
Operating profit....................... $ 8,978 $ 1,403 $ 83 $ -- $ 10,464
Identifiable assets,
September 30, 1995.................. $ 93,162 $ 43,966 $ 8,443 $ -- $145,571
Nine months ended September 30, 1996
(unaudited):
Total sales............................ $ 91,991 $ 54,007 $16,481 $(11,171) $151,308
Operating profit....................... $ 10,970 $ (2,702) $ 302 $ -- $ 8,570
Identifiable assets,
September 30, 1996.................. $ 69,105 $ 38,331 $ 8,947 $ -- $116,383
</TABLE>
Sales between geographic areas are made at the cost of producing the items plus
a profit margin. Operating profit is total operating revenue less operating
expenses; interest, other nonoperating income and expenses and income taxes are
not considered in computing operating profit. Identifiable assets are those
assets identified with the operations in each geographic area. Identifiable
assets exclude the net assets of discontinued operations.
(9) BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are in the consumer products retail
industry. Approximately 11%, 15%, and 14% of net sales for the years ended
December 31, 1993, 1994, and 1995, respectively, were with one customer.
Approximately 14% and 12% (unaudited) of net sales for the nine-month periods
ended September 30, 1995 and 1996, respectively, were with one customer. The
Company's ten largest customers accounted for approximately 41%, 46%, and 49% of
the Company's net sales for 1993, 1994, and 1995, respectively, approximately
51% (unaudited) and 56% (unaudited) of the Company's net sales for each of the
nine-month periods ended September 30, 1995 and 1996, respectively, and
approximately 44%, 44% and 60% of the Company's accounts receivable balances at
December 31, 1994 and 1995, and September 30, 1996 (unaudited), respectively.
(10) FOREIGN GOVERNMENT GRANTS
Under various agreements between one of the Company's foreign subsidiaries
and the industrial development authority of a foreign government, the foreign
subsidiary has received, upon satisfaction of certain conditions, grants from
the foreign government amounting to approximately 45% of the cost of acquiring
certain capital assets. In accordance with the grant agreements, the foreign
subsidiary is required to maintain retained earnings in the amount of $5.3
million that may not be distributed as dividends for a period of 10 years from
the date of the grant agreements. The foreign government may revoke the grants
and require repayment of grants received by the foreign subsidiary if the
foreign subsidiary violates any of the various grant agreements' provisions.
Violation of the agreements would occur if, among other things, the foreign
subsidiary changes the nature of its operations, ceases to operate, stops paying
its liabilities, or becomes bankrupt. The foreign subsidiary believes it is in
compliance with the provisions of the agreements. The foreign subsidiary's
contingent liability for the repayment of grants received terminates 10 years
from receipt of the grant amounts and amounted to $3.7 million at December 31,
1995 and September 30, 1996 (unaudited). This contingent
F-20
<PAGE> 110
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability expires in varying amounts (ranging from $157,000 to $837,000
annually) beginning in 1996 and ending in 2004.
(11) DISCONTINUED OPERATIONS
During the early part of 1995 the Company was in the process of negotiating
the restructuring and refinancing of its existing debt. Based upon negotiations
with the lenders and a comprehensive product strategy and planning strategy
review, it was decided to dispose of a major subsidiary and related product
lines. As a result, the Company adopted a formal plan of disposal and engaged an
investment banking firm to sell its McCulloch Corporation subsidiary and other
related assets worldwide. Subsequently, the Company entered into an agreement in
October 1995 with a buyer to sell all of the McCulloch operations which sale was
completed on November 1, 1995. Furthermore, the agreement to sell McCulloch
required the Company to distribute McCulloch products in certain European
locations through December 31, 1996. The Company was obligated to use the net
proceeds from the sale of the operations to reduce debt.
The assets and liabilities of the discontinued operations have been
reclassified in the accompanying consolidated financial statements to separately
identify them as net current assets and net noncurrent assets related to
discontinued operations. These net assets consist of net working capital, net
property, plant and equipment, other assets, and intangible assets, less related
liabilities, as follows as of December 31, 1994 and 1995 and September 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Accounts receivable..................................... $ 38,380 $ 8,734 $10,819
Inventory............................................... 74,160 9,223 9,533
Prepaid expenses........................................ 7,955 1,072 900
------- ------- -------
120,495 19,029 21,252
------- ------- -------
Current liabilities:
Loans payable........................................... 8,667 -- --
Accounts payable........................................ 40,603 -- --
Accrued expenses........................................ 4,117 -- --
------- ------- -------
53,387 -- --
------- ------- -------
Net current assets of discontinued operations............. $ 67,108 $19,029 $21,252
======= ======= =======
Noncurrent assets:
Fixed assets............................................ $ 62,928 $ -- $ --
Other assets and intangibles............................ 7,915 -- --
------- ------- -------
70,843 -- --
------- ------- -------
Noncurrent liabilities:
Deferred income taxes................................... 8,419 -- --
Other liabilities....................................... 8,017 -- --
------- ------- -------
16,436 -- --
------- ------- -------
Net noncurrent assets of discontinued operations.......... $ 54,407 $ -- $ --
======= ======= =======
</TABLE>
The disposal of the McCulloch operations has been accounted for as a
discontinued operation and, accordingly, its operating results are segregated
and reported as discontinued operations in the accompanying
F-21
<PAGE> 111
SHOP-VAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated statement of operations. Prior year financial statements have been
reclassified to conform with the current year presentation. Sales and related
costs of the European distribution arrangement are included in discontinued
operations and inventory and receivables related to the distribution agreement
are included with net current assets of discontinued operations. Summarized
information relating to the McCulloch operations for the years ended December
31, 1993 and 1994 and the ten months ended October 31, 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales.......................................... $203,578 $247,160 $267,123
Cost and expenses.................................. 209,279 252,880 277,838
-------- -------- --------
Loss before income taxes........................... (5,701) (5,720) (10,715)
Income tax (benefit)............................... (1,553) (1,195) (76)
-------- -------- --------
Net loss........................................... $ (4,148) $ (4,525) $(10,639)
======== ======== ========
</TABLE>
The Company has recorded a loss on disposition of the net assets of
discontinued operations of $120.3 million, net of a tax benefit of $0.5 million,
which was recorded in the fourth quarter of 1995. The loss on disposal
represents the net book value of the operations being disposed of less the
proceeds received of $30 million in November 1995. Further, the loss includes
charges amounting to $19.6 million for reduction in the number of employees as a
result of the sale, consolidation of certain offices and leased facilities,
disposition of certain assets, estimated losses on existing contractual
arrangements, estimated losses on European distribution of McCulloch products
through December 31, 1996 and certain other charges resulting from the McCulloch
disposition, such as certain indemnity obligations arising in connection with
the McCulloch disposition, including, but not limited to, indemnification of the
purchaser of McCulloch with respect to certain potential environmental, lease,
product and workers' compensation liabilities. Through September 30, 1996
approximately $1.9 million (unaudited) of cash had been paid with respect to
those items.
F-22
<PAGE> 112
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 12
The Exchange Offer.................... 19
Use of Proceeds....................... 26
Capitalization........................ 27
McCulloch Disposition................. 28
Selected Consolidated Financial
Data................................ 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 31
Business.............................. 39
Management............................ 53
Certain Relationships and Related
Transactions........................ 57
Principal Stockholders................ 58
Description of Certain Indebtedness... 59
Description of Exchange Notes......... 63
Book Entry; Delivery and Form......... 82
Certain Federal Income Tax
Considerations...................... 84
Plan of Distribution.................. 85
Legal Matters......................... 86
Experts............................... 86
Available Information................. 86
Index to Financial Statements......... F-1
</TABLE>
UNTIL APRIL 28, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE
NOTES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENT OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
LOGO
SHOP VAC CORPORATION
OFFER TO EXCHANGE ITS
10 5/8% SENIOR SECURED NOTES
DUE 2003
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY
AND ALL OF ITS OUTSTANDING
10 5/8% SENIOR
SECURED NOTES DUE 2003
------------------------
PROSPECTUS
------------------------
January 28, 1997
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